[Federal Register Volume 71, Number 65 (Wednesday, April 5, 2006)]
[Notices]
[Pages 17164-17232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3090]



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Part II





Department of Justice





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Antitrust Division



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Competitive Impact Statements and Proposed Consent Judgments--Response 
to Public Comments; Notice

  Federal Register / Vol. 71, No. 65 / Wednesday, April 5, 2006 / 
Notices  

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DEPARTMENT OF JUSTICE

Antitrust Division


Response to Public Comments on the Proposed Final Judgments in 
United States v. SBC Communications, Inc. and AT&T Corp. and United 
States v. Verizon Communications Inc. and MCI, Inc.

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)-(h), the United States hereby publishes the three comments 
received on the proposed Final Judgments in United States v. SBC 
Communications, Inc. and AT&T Corp., Civil Case No. 1:05CV02102 (EGS), 
and United States v. Verizon Communications, Inc. and MCI, Inc., Civil 
Case No. 1:05CV02103 (EGS), filed on March 21, 2006 in the United 
States District Court for the District of Columbia, together with the 
response of the United States to the comments. On October 27, 2005, the 
United States filed separate complaints alleging that the proposed 
acquisitions of AT&T Corp. (``AT&T'') by SBC Communications, Inc. 
(``SBC'') and MCI, Inc. (``MCI'') by Verizon Communications, Inc. 
(``Verizon'') would both violate section 7 of the Clayton Act, 15 
U.S.C. 18, by substantially lessening competition in the provision of 
local private lines (also called ``special access'') and other 
telecommunications services that rely on local private lines in eleven 
and eight, respectively, metropolitan areas--SBC/AT&T: Chicago; Dallas-
Fort Worth; Detroit; Hartford-New Haven, Connecticut; Indianapolis; 
Kansas City; Los Angeles; Milwaukee; San Diego; San Francisco-San Jose; 
and St. Louis; and Verizon/MCI: Baltimore; Boston; New York; 
Philadelphia; Tampa; Richmond, Virginia; Providence, Rhode Island; and 
Portland, Maine. To restore competition, the proposed Final Judgments, 
if entered, would require the defendants in both actions to divest 
assets in the metropolitan areas listed above in order to proceed with 
the acquisitions. Public comment was invited within the statutory 60-
day comment period. The comment and the response of the United States 
thereto are hereby published in the Federal Register, and shortly 
thereafter these documents will be referenced in a Certificate of 
Compliance with Provisions of the Antitrust Procedures and Penalties 
and filed with the Court, together with a motion urging the Court to 
enter the proposed Final Judgment. Copies of the Complaint, the 
proposed Final Judgment, the Competitive Impact Statement, and other 
papers are currently available for inspection in Room 200 of the 
Antitrust Division, Department of Justice, 325 Seventh Street, NW., 
Washington, DC 20530, telephone: (202) 514-2481 and the Clerk's Office, 
United States District Court for the District of Columbia, 333 
Constitution Avenue, NW., Washington, DC 20001. (The United States's 
Certificate of Compliance with Provisions of the Antitrust Procedures 
and Penalties Act will be made available at the same locations shortly 
after they are filed with the Court.) Copies of any of these materials 
may be obtained upon request and payment of a copying fee.

J. Robert Kramer II,
Director of Operations, Antitrust Division.

In The United States District Court for The District of Columbia

United States of America, Plaintiff, v. SBC Communications, Inc. and 
AT&T Corp., Defendants

[Civil Action No.: 1:05CV02102 (EGS)]

United States of America, Plaintiff, v. Verizon Communications Inc. and 
MCI, Inc., Defendants

[Civil Action No.: 1:05CV02103 (EGS)]

Plaintiff United States' Response to Public Comments

    Pursuant to the requirements of the antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h) (``APPA'' or ``Tunney Act''), the 
United States hereby responds to the public comments received regarding 
the proposed Final Judgments in these cases. After careful 
consideration of the comments, the United States continues to believe 
that the proposed Final Judgments will provide an effective and 
appropriate remedy for the antitrust violations alleged in the 
Complaints. The United States will move the court for entry of the 
proposed Final Judgments after the public comments and this Response 
have been published in the Federal Register, pursuant to 15 U.S.C. 
16(d).
    On October 27, 2005, the United States filed the Complaints in 
these matters alleging that the proposed acquisition of AT&T Corp. 
(``AT&T'') by SBC Communications, Inc. (``SBC''), and the proposed 
acquisition of MCI, Inc. (``MCI'') by Verizon Communications Inc. 
(``Verizon''), would violate Section 7 of the Clayton Act, 15 U.S.C. 
18.\1\ Simultaneously with the filing of the Complaints, the United 
States filed proposed Final Judgments \2\ and Stipulations signed by 
plaintiff and defendants consenting to the entry of the respective 
proposed Final Judgments after compliance with the requirements of the 
Tunney Act. Pursuant to those requirements, the United States filed 
Competitive Impact Statements (``CISs'') in this Court on November 16, 
2005; published the proposed Final Judgments and CISs in the Federal 
Register on December 15, 2005, see United States v. SBC Communications 
Inc. and AT&T Corp., 70 FR 74,334, 2005 WL 3429685; United States v. 
Verizon Communications Inc. and MCI, Inc., 70 FR 74,350 2005 WL 
3429686; and published summaries of the terms of the proposed Final 
Judgment and CISs, together with directions for the submission of 
written comments relating to the proposed Final Judgments, in the 
Washington Post for seven days beginning on December 8, 2005 and ending 
on December 14, 2005. The 60-day period for public comments ended on 
February 13, 2006, and three comments were received as described below 
and attached hereto.
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    \1\ Because these matters raised similar issues, including 
almost identical allegations of competitive harm and proposed 
relief, the United States filed an uncontested motion to consolidate 
them on November 1, 2005. That motion was granted by the Court. 
Because the Complaints, Competitive Impact Statements, and proposed 
Final Judgments in the two matters are virtually identical, the 
documents will be referred to collectively. Moreover, because the 
comments received by the United States generally relate to both 
matters, this response will also refer to both, unless otherwise 
indicated.
    \2\ The United States filed amended proposed Final Judgments on 
November 28, 2005. The amendments added appropriate procedural 
recitals regarding the Court's public interest determination to both 
proposed Final Judgments and corrected an error in the SBC/AT&T 
proposed consent decree, conforming it to the parties' intent. The 
SBC/AT&T Competitive Impact Statement reflects the correction to the 
proposed Final Judgments. The corrected versions, not the original 
versions, were published in the Federal Register. None of the public 
comments addressed this aspect of the proposed Final Judgment.
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I. Background: The United States' Investigation and Proposed Resolution

    On January 30, 2005, SBC entered into an agreement to acquire AT&T. 
On February 14, 2005, Verizon entered into an agreement to acquire MCI. 
Over the following eight and a half months, the United States 
Department of Justice (``Department'') conducted an extensive, detailed 
investigation into the competitive effects of the proposed 
transactions. As part of this investigation, the Department issued 
Second Requests to the merging parties, as well as more than 60 Civil 
Investigative Demands to third parties. In response, the Department 
received and considered more than 25 million pages of material. More 
than 200 interviews were conducted with customers, competitors, and 
other

[[Page 17165]]

individuals with knowledge of the industry. Two commenters here--
COMPTEL and ACTel--represented carriers who had complaints about the 
proposed transactions; the investigative staff carefully analyzed their 
allegations and submissions, as well as the views and data presented by 
dozens of others. While the Department was reviewing these 
transactions, the Federal Communications Commission (``FCC''),\3\ 
numerous state public utility commissions, and several state Attorneys 
General conducted their own reviews. The third commenter, the Attorney 
General of the State of New York, was one of the reviewing state 
officials.
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    \3\ The FCC approved the proposed mergers in orders adopted on 
October 31, 2005, and released on November 17, 2005, including 
voluntary commitments of the parties as conditions. Memorandum 
Opinion and Order, In the Matter of SBC Communications Inc. and AT&T 
Corp. Applications for Approval of Transfer of Control, FCC WC 
Docket No. 05-65 (rel. Nov. 17, 2005), 2005 WL 3099626; Memorandum 
Opinion and Order, In the Matter of Verizon Communications Inc. and 
MCI, Inc. Applications for Approval of Transfer of Control, FCC WC 
Docket No. 05-75 (rel. Nov. 17, 2005), 2005 WL 3099625 (collectively 
``FCC Orders'').
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    As part of the Department's investigation, it considered the 
potential competitive effects of these transactions on numerous 
products, customer groups, and geographic areas. For the vast majority 
of these, the Department concluded that the proposed mergers were 
unlikely to reduce competition. Indeed, the Department concluded that, 
viewed as a whole, the transactions were likely to create substantial 
efficiencies that could benefit consumers. For the most part, the 
mergers combined firms with complementary strengths, assets, and 
customer bases. Whereas SBC's and Verizon's strengths were in the 
``mass market'' and small business segments, AT&T's and MCI's strengths 
were in serving large enterprises; whereas SBC and Verizon had very 
extensive local networks, AT&T and MCI had extensive national and 
international networks. In areas of significant overlap, with the 
exception of the markets alleged in the Complaints, there will remain, 
post-merger, sufficient competitive alternatives such that no 
anticompetitive effects are likely.
    Because AT&T and MCI have among the most extensive local networks 
of any competitive local exchange carriers (``CLECs'') in SBC's and 
Verizon's regions, the Department devoted substantial time and 
resources to analyzing those overlapping assets, and the products and 
markets they implicated to determine whether the merger would likely 
reduce competition.\4\ The Department sought extensive data from the 
merging firms as well as dozens of CLECs regarding their local 
networks, and the products provided over those networks. In every 
metropolitan area of overlap, the Department found that there were 
multiple CLECs with local networks offering products and services very 
similar to the merging firms. Indeed, in most of the overlapping 
metropolitan areas the acquired CLEC did not even have the most 
extensive local network in terms of number of buildings connected or 
miles of fiber-optic cable installed. And even in the few cases where 
the acquired CLEC did have the most extensive local network, there were 
ample other firms that have extensive networks and that continue to 
grow those networks.
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    \4\ Local networks typically are comprised principally of fiber-
optic cable running throughout the metropolitan area. Fiber 
connecting aggregation points is often called ``transport'' fiber, 
and fiber running from a central office or node to an end-user 
building is often referred to as a loop or ``last-mile connection.'' 
These local networks are typically used to provide services to large 
enterprise customers. As part of its investigation, the Department 
interviewed scores of such customers, and received affidavits from 
dozens of others. In general, customers had little competitive 
concern regarding the proposed mergers and, indeed, many believed 
they were likely to be beneficial.
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    Nevertheless, the Department identified one limited competitive 
problem: for hundreds of buildings, the transactions would combine the 
only two firms that owned or controlled a direct fiber-optic connection 
to the building, and for a subset of these buildings, entry (i.e., 
another carrier constructing its own fiber-optic connection) was not 
sufficiently likely to offset the potential anticompetitive effect. 
These fiber-optic connections are used to provide Local Private Lines 
\5\ to wholesale and retail customers and value-added 
telecommunications services that rely on Local Private Lines. 
Accordingly, the Department filed Complaints alleging competitive harm 
in this set of buildings and sought a remedy that would ensure that for 
each of the buildings where there would otherwise be a reduction in 
competition, there would be, post-merger, another carrier besides the 
merged firm with a direct fiber-optic connection to the building. In 
the Department's judgment, a divestiture of fiber-optic capacity to the 
buildings of concern would remedy this potential loss of 
competition.\6\
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    \5\ ``A Local Private Line is a dedicated, point-to-point 
circuit offered over copper and/or fiber-optic transmission 
facilities that originates and terminates within a single 
metropolitan area and typically includes at least one local loop. 
Local Private Lines are sold at both retail (to business customers) 
and wholesale (to other carriers). [SBC and Verizon refer] to Local 
Private Line circuits as `special access.' Depending on how they are 
configured, Local Private Lines can be used to carry voice traffic, 
data, or a combination of the two. Local Private Lines may be 
purchased as stand-alone products but are also an important input to 
value-added voice and data telecommunications services that are 
offered to business customers.'' Complaints ]] 13-14.
    \6\ The modest nature of the competitive problem, as compared to 
the overall value of the mergers, is illustrated by the fact that in 
2004, Local Private Lines offered by AT&T in SBC's territory 
accounted for less than 0.3 per cent of AT&T's total revenues. And, 
the revenues attributable to the buildings at issue in this case 
would be a fraction of that.
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    As explained more fully in the Complaints and CISs, the proposed 
transaction would lessen competition substantially for (a) Local 
Private Lines and (b) voice and data telecommunications services that 
rely on Local Private Lines in several hundred commercial buildings. To 
restore competition, the proposed Final Judgments, if entered, would 
require a divestiture of indefeasible rights of use (``IRUs'') \7\ for 
lateral connections \8\ to the buildings in question along with 
transport facilities \9\ sufficient to enable the IRUs to be used by 
the purchaser to provide telecommunications services. Entry of the 
proposed Final Judgments would terminate these actions, except that the 
Court would retain jurisdiction to construe, modify, or enforce the 
provisions of the proposed Final Judgments and punish violations 
thereof.\10\
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    \7\ ``An IRU (or indefeasible right of use) is a long-term 
leasehold interest commonly used in the telecommunications industry 
that gives the holder the right to use specified strands of fiber in 
a telecommunications facility.'' CISs at 11.
    \8\ A ``lateral connection'' is the last segment of the fiber-
optic cable to a building, running from the point of entry of the 
building to the splice point with fiber used to serve different 
buildings. CISs at 10.
    \9\ ``Transport,'' as used in the industry, has no precise 
meaning but generally refers to fiber-optic capacity to carry data 
between aggregation points on a network. Often, it is used to refer 
to ``interoffice transport,'' i.e., carriage of data between two 
central offices (switching facilities). In the proposed Final 
Judgments and CISs the term more broadly refers to facilities used 
to carry data from the splice point of the lateral connection to the 
purchaser's network. CISs at 9-11.
    \10\ The SBC/AT&T merger closed on December 18, 2005, and the 
Verizon/MCI merger closed on January 6, 2006. In keeping with the 
United States' standard practice, neither the Stipulations nor the 
proposed Final Judgment prohibited closing the mergers. See ABA 
Section of Antitrust Law, Antitrust Law Developments 387 (5th ed. 
2002) (noting that ``[t]he Federal Trade Commission (as well as the 
Department of Justice) generally will permit the underlying 
transaction to close during the notice and comment period''). Such a 
prohibition could interfer with many time-sensitive deals or prevent 
the realization of substantial efficiencies. Here, the magnitude of 
the potential competitive harm from the mergers was relatively 
small, but delaying the closing of the transactions by the several 
months required for the Tunney Act public interest determination 
could have costs tens, if not hundreds, of millions of dollars in 
lost efficiencies from the transactions as a whole. In consent 
decrees requiring divestitures, it is also standard practice to 
include ``preservation of assets'' clauses in the decree and 
stipulation to ensure that the assets to be divested remain 
competitively viable. That practice was followed here. Proposed 
Final Judgments Sec.  VIII; Stipulations Sec.  V. In appropriate 
cases, particularly where a separate, distinct operating business is 
to be divested, ``hold separate'' provisions are also included. In 
the Proposed Final Judgments at issue here, no ``hold separate'' 
provisions were necessary or appropriate, as the divested assets are 
not of a type that could meaningfully be ``held separate.''

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II. Legal Standard Governing the Court's Public Interest Determination

    Upon publication of the public comments and this Response, the 
United States will have fully complied with the Tunney Act. It will 
then ask the Court to determine that entry of the proposed Final 
Judgments would be ``in the public interest,'' and to enter them. 15 
U.S.C. 16(e). In making its public interest determination, the Court 
shall consider:

    (A) the competitive impact of such judgment, including 
termination of alleged violations, provisions for enforcement and 
modification, duration or relief sought, anticipated effects of 
alternative remedies actually considered, whether its terms are 
ambiguous, and any other competitive considerations bearing upon the 
adequacy of such judgment that the court deems necessary to a 
determination of whether the consent judgment is in the public 
interest; and
    (B) the impact of entry of such judgment upon competition in the 
relevant market or markets, upon the public generally and 
individuals alleging specific injury from the violations set forth 
in the complaint including consideration of the public benefit, if 
any, to be derived from a determination of the issues at trial.

Id. section 16(e)(1). As the Court of Appeals has held, the Tunney Act 
permits a court to consider, among other things, the relationship 
between the remedy secured and the specific allegations set forth in 
the government's complaint, whether the proposed Final Judgment is 
sufficiently clear, whether enforcement mechanisms are sufficient, and 
whether the proposed Final Judgment may positively harm third parties. 
See United States v. Microsoft Corp., 56 F.3d 1448, 1458-62 (D.C. Cir. 
1995).
    The Tunney Act is not intended to impose on a court procedures that 
would impair the utility of consent decrees in antitrust enforcement. 
Thus, the Act is not to ``be construed to require the court to conduct 
an evidentiary hearing or to require the court to permit anyone to 
intervene.'' 15 U.S.C. 16(e)(2)(2006). In conducting its public 
interest inquiry, ``[t]he court is nowhere compelled to go to trial or 
to engage in extended proceedings which might have the effect of 
vitiating the benefits of prompt and less costly settlement through the 
consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement of 
Sen. Tunney).\11\ Rather:
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    \11\ The public interest determination can be made on the basis 
of the CISs and the United States' Response to Comments. The Tunney 
Act authorizes the court to use various procedures to gather 
additional information, 15 U.S.C. 16(f), but a court need not invoke 
them unless it believes that the information already available is 
insufficient to resolve any critical issues that the public comments 
may have raised. See H.R. Rep. No. 93-1463, 93d Cong., 2d Sess. 8-9 
(1974), as reprinted in 1974 U.S.C.C.A.N. 6535, 6538-39.

    [a]bsent a showing of corrupt failure of the government to 
discharge its duty, the Court, in making its public interest 
finding, should * * * carefully consider the explanations of the 
government in the competitive impact statement and its responses to 
comments in order to determine whether those explanations are 
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reasonable under the circumstances.

United States v. Mid-America Dairymen, Inc., 1977-1 Trade Cas. (CCH) ] 
61,508, at ] 71,980, 1977 WL 4352, at *9 (W.D. Mo. 1977).
    A court's task under the Tunney Act is to review the negotiated 
settlement of a dispute, not to devise a remedy for an adjudicated 
antitrust violation. Accordingly, a court may not ``engage in an 
unrestricted evaluation of what relief would best serve the public.'' 
United States v. BNS Inc., 858 F.2d 456, 462 (9th Cir. 1988) (quoting 
United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see 
also Microsoft, 56 F.3d at 1460-62.\12\ Courts have held that:
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    \12\ Cf. United States v. Gillette Co., 406 F. Supp. 713, 716 
(D. Mass. 1975) (recognizing it was not the court's duty to 
determine whether the proposed decree was the best settlement, 
because the parties, not the court, settle the dispute).

    [t]he balancing of competing social and political interests 
affected by a proposed antitrust consent decree must be left, in the 
first instance, to the discretion of the Attorney General. The 
court's role in protecting the public interest is one of insuring 
that the government has not breached its duty to the public in 
consenting to the decree. The court is required to determine not 
whether a particular decree is the one that will best serve society, 
but whether the settlement is ``within the reaches of the public 
interest.'' More elaborate requirements might undermine the 
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effectiveness of antitrust enforcement by consent decree.

Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted).\13\
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    \13\ Cf. BNS, 858 F.2d at 464 (holding that the court's 
``ultimate authority under the [Tunney Act] is limited to approving 
or disapproving the consent decree''); Gillette, 406 F. Supp. at 716 
(noting that the court is constrained to ``look at the overall 
picture not hypercritically, nor with a microscope, but with an 
artist's reducing glass''); see generally Microsoft, 56 F.3d at 1461 
(discussing whether ``the remedies [obtained in the decree are] so 
inconsonant with the allegations charged as to fall outside of the 
`reaches of the public interest' '').
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    The proper test of the proposed Final Judgment, therefore, is not 
whether it is certain to eliminate every anticompetitive effect of a 
particular merger or to assure absolutely undiminished competition in 
the future. Court approval of a consent judgment must be subject to a 
standard more flexible and less strict than the standard the court 
would apply were it devising a remedy after an adjudication of 
liability. Microsoft, 56 F.3d at 1460-61 (``[W]hen a consent decree is 
brought to a district judge, because it is a settlement, there are no 
findings that the defendant has actually engaged in illegal practices. 
It is therefore inappropriate for the judge to measure the remedies in 
the decree as if they were fashioned after trial.'' (citation 
omitted)); see also United States v. AT&T Corp., 552 F. Supp. 131, 151 
(D.D.C. 1982) (``[A] proposed decree must be approved even if it falls 
short of the remedy the court would impose on its own, as long as it 
falls within the range of acceptability or is `within the reaches of 
public interest.' '') (quoting Gillette, 406 F. Supp. at 716), aff'd 
sub nom. Maryland v. United States, 460 U.S. 1001 (1983); United States 
v. Aclan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985) 
(approving the consent judgment even though the court might have 
imposed a greater remedy had the matter been litigated).
    The Court must evaluate the adequacy of the proposed decree as a 
remedy for the antitrust violations alleged in the Complaint, not for 
other supposed violations. The Tunney Act does not authorize the Court 
to ``construct [its] own hypothetical case and then evaluate the decree 
against that case.'' Microsoft, 56 F.3d at 1459. Because the ``court's 
authority to review the decree depends entirely on the government's 
exercising its prosecutorial discretion by bringing a case in the first 
place,'' it follows that ``the court is only authorized to review the 
decree itself,'' and not to ``effectively redraft the complaint'' to 
inquire into other matters that the United States did not pursue. Id. 
at 1459-60. The United States is entitled to ``due respect'' concerning 
its ``prediction as to the effect of proposed remedies, its preception 
of the market structure, and its view of the nature of the case.'' 
United States v. Archer-Daniels-Midland Co., 272 F. Supp. 2d 1, 6 
(D.D.C. 2003) (citing Microsoft, 56 F.3d at 1461).

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    In 2004, Congress amended provisions of the Tunney Act, but the 
amendments did not materially affect the scope or standard of review. 
Where pre-amendment the Act provided a list of factors a court ``may'' 
consider in making its public interest determination, post-amendment 
the court ``shall'' consider the listed factors. Compare 15 U.S.C. 
16(e) (2004) with 15 U.S.C. 16(e)(1) (2006) (amended version). Of 
course, even before the amendment courts were unlikely to choose to 
ignore factors that were on the list, and thus of clear congressional 
interest, merely because the statute used ``may'' rather than 
``shall.'' The amendment also slightly modified the list of factors. It 
added one new factor (whether the terms of the judgment are ambiguous, 
15 U.S.C. 16(e)(1)(A), which the Court of Appeals had already made 
clear was appropriate to consider, Microsoft, 56 F.3d at 1461-62); 
modified a catch-all factor to limit its scope to competitive 
considerations; \14\ and added ``upon competition in the relevant 
market or markets'' to the list of impacts to be considered, 15 U.S.C. 
16(e)(1)(B), as one would expect in an antitrust case. As for 
procedure, the amendment added the unambiguous directive that 
``[n]othing in this section shall be construed to require the court to 
conduct an evidentiary hearing or to require the court to permit anyone 
to intervene.'' 15 U.S.C. 16(e)(2).
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    \14\ The language was modified to read ``any other competitive 
considerations bearing upon the adequacy of such judgment that the 
court deems necessary to a determination of whether the consent 
judgment is in the public interest.'' 15 U.S.C. 16(e)(1)(A) (italics 
indicate new language).
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    In addition to amending the Tunney Act, Congress made findings. In 
particular, it found that ``it would misconstrue the meaning and 
Congressional intent in enacting the Tunney Act to limit the discretion 
of district courts to review antitrust consent judgments solely to 
determining whether entry of those consent judgments would make a 
`mockery of the judicial function.' '' \15\ That finding seems entirely 
correct. And, so far as we know, no court has ever construed the Tunney 
Act to limit judicial review solely to whether the proposed judgment 
would make a ``mockery of the judicial function.'' \16\ In any event, 
Congress in 2004 did not change the applicable standard, but limited 
itself to a finding purporting to clarify its intent of 30 years ago--a 
finding that is not inconsistent with the case law's interpretation of 
the Tunney Act.
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    \15\ Antitrust Criminal Penalty Enhancement and Reform Act of 
2004, Pub. L. No. 108-237, Sec.  221(a)(1)(B), 118 Stat. 661, 668 
(2004).
    \16\ ``[M]ockery of the judicial function'' echoes Microsoft's 
``[a] decree * * * is a judicial act, and therefore the district 
judge is not obliged to accept one that, on its face and even after 
government explanation, appears to make a mockery of judicial 
power.'' Microsoft, 56 F.3d at 1462 (emphasis added). The Court of 
Appeals was, of course, not limiting Tunney Act review solely to 
whether a decree makes a ``mockery of judicial power.'' It 
explicitly stated that in a Tunney Act review, ``the court can and 
should inquire * * * into the purpose, meaning, and efficacy of the 
decree. If the decree is ambiguous, or the district judge can 
foresee difficulties in implementation, we would expect the court to 
insist that these matters be attended to. And certainly, if third 
parties contend that they would be positively injured by the decree, 
a district judge might well hesitate before assuming that the decree 
is appropriate.'' Id. at 1462. A comparison of the Tunney Act as 
amended, and the associated congressional findings, with Microsoft 
perhaps suggests why Senator Hatch, then Chairman of the Senate 
Judiciary Committee, said that ``this amendment essentially codifies 
existing case law.'' 150 Cong. Rec. S3610, at S3613 (daily ed. Apr. 
2, 2004).
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    The purpose of the Tunney Act, both before and after amendment, is 
clear: courts must determine that a proposed decree is in the public 
interest before entering it, and must do so after the public has had an 
opportunity to comment and the government has responded to any 
comments. As part of that determination, a court should consider 
certain factors listed in the Act relating to the competitive impact of 
the judgment and whether it adequately remedies the harm alleged in the 
complaint. But the scope of a court's review is not unlimited: The 
Tunney Act does not permit a court to redraft the complaint, examine 
possible competitive harm the United States did not allege, or engage 
in a wide-ranging search for the relief that would best serve the 
public.

III. Summary of Public Comments and Responses

    During the 60-day public comment period, the United States received 
comments from COMPTEL, ACTel, and the New York State Attorney General. 
Upon review, the United States believes that nothing in the comments 
warrants a change in the proposed Final Judgments or is sufficient to 
suggest that the proposed Final Judgments are not in the public 
interest. These comments, in large measure, do not address whether the 
proposed remedy adequately redresses the competitive harm alleged in 
the Complaints, but rather whether the United States should have 
brought a different much broader case. The comments do include some 
concerns relating to whether the proposed Final Judgments adequately 
remedy the alleged harms. The United States addresses these concerns 
below and explains how the remedy is appropriate.

A. ACTel

1. Summary of Comment
    The Alliance for Competition in Telecommunications (``ACTel'') is a 
group whose members include CLECs and interexchange carriers (``IXC'') 
that buy Local Private Lines at wholesale from the merging 
companies,\17\ and compete against the merging companies for retail 
business customers. On February 9, 2006, ACTel submitted a comment 
alleging that the proposed remedy ``cannot succeed'' and fails to meet 
the Tunney Act standard. After some discussion of that standard,\18\ 
and a description of ACTel's view of the wholesale markets for Local 
Private Lines, ACTel criticizes the proposed Final Judgments. ACTel 
notes that whereas the Complaints allege harm to competition in the 
provision of Local Private Lines, the remedy is focused on the 
divestiture of (a) certain laterals to particular buildings, and (b) 
sufficient transport to connect those circuits to the network of the 
entity purchasing the divested lateral circuits. ACTel identifies what 
it claims are three ``deficiencies'' in the remedy that will prevent it 
from being effective.
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    \17\ ACTel Comment at 3 (attached hereto as Attachment 1). ACTel 
was formed in March 2005 by six competitive carriers ``to challenge 
the Verizon/MCI and SBC/AT&T mergers'' and was an active complainant 
in both the United States' and FCC's investigations of these 
transactions. Competitive Carriers Challenge Telecom Mergers (Mar. 
15, 2005), available at http://www.allianceforcompetition.com/newsroom/release/050315-1.php.
    \18\ ACTel states that the public interest determination here 
``will constitute the first significant application of the Tunney 
Act since Congress amended that statute in 2004.'' ACTel Comment at 
4. However, since the effective date of the Tunney Act amendments--
June 22, 2004--at least 12 antitrust consent decrees have been 
reviewed by courts, found to be in the public interest, and entered.
---------------------------------------------------------------------------

    First, ACTel notes that the proposed Final Judgements do not cover 
all buildings for which the mergers will reduce the number of Local 
Private Line competitors from ``2 to 1'' (i.e., buildings where only 
the merging firms have last-mile connections). Relying on data 
purchased from a third party, ACTel contends that the number of 
buildings for which the United States seeks relief is at least two 
orders of magnitude less than the number of buildings it believes 
present a 2-to-1 problem. It thus contends that the ``Government's 
remedy does not include all buildings that the Complaint purports to 
cover,'' suggests that the ``Government needs to explain its 
methodology,'' and argues that ``[i]f the Proposed Final Judgment does 
not address all situations in which AT&T is

[[Page 17168]]

eliminated as the only facilities-based competitive alternative to SBC 
for loops, the court must withhold its approval of the settlements.'' 
\19\
---------------------------------------------------------------------------

    \19\ Id. at 12, 15.
---------------------------------------------------------------------------

    Second, ACTel contends that the proposed Final Judgments are 
deficient because they address ``only the part of the Local Private 
Line that connects to a building, not the part of the Private Line that 
connects to a carrier's network.'' It argues that if the number of 
suppliers of the ``transport'' part of the network (the part of a 
circuit that interconnects carrier central offices) goes from two to 
one, customers of Local Private Lines will still be subject to 
competitive harm, and contends that the United States must look at 
transport on a ``segment by segment'' basis. In short, ACTel contends 
that the proposed remedy is ineffective because customers will ``still 
be subject to the `2 to 1' choke hold because the Government's remedy 
does not include transport (unless it is attendant to a divested loop 
for a building).'' \20\
---------------------------------------------------------------------------

    \20\ Id. at 21.
---------------------------------------------------------------------------

    ACTel's third alleged deficiency is that the remedy addresses only 
2-to-1 situations, whereas it believes there are ``many 
`anticompetitive effects' in Private Line situations beyond `2 to 1' 
loops.'' \21\ In particular, it argues that 4-to-3 and 3-to-2 
situations also create a competitive problem here, and suggests that 
the United States has done ``an about-face'' and engaged in a 
``significant departure from established and documented procedures'' by 
not alleging a competitive problem in those instances.\22\ Finally, 
ACTel argues that a purchaser of the divested assets, even if it is a 
``viable, ongoing telecommunications business'' may not be an effective 
competitive substitute for AT&T and MCI at least in part because its 
network would not be as broad, or its customer base as ``robust.'' \23\ 
ACTel concludes by suggesting alternate remedies to those contained in 
the proposed Final Judgments including divestiture of ``all redundant 
loop and transport circuits,'' releasing customers from their current 
contracts, and prohibiting the merged firms from raising prices.\24\
---------------------------------------------------------------------------

    \21\ Id.
    \22\ Id. at 23.
    \23\ Id. at 24.
    \24\ Id. at 25.
---------------------------------------------------------------------------

2. Response
    Tunney Act review principally addresses the adequacy of the remedy, 
not the adequacy of the complaint.\25\ Most of the issues ACTel raises, 
however, question the wisdom of the filed Complaints, and urge theories 
of competitive harm that the United States did not believe were 
supported by the evidence. Additionally, in a number of instances in 
which ACTel claims to be challenging the adequacy of the remedy, ACTel 
construes the Complaints far too broadly. For instance, ACTel misreads 
the Complaints as identifying a competitive problem in all 2-to-1 
buildings. The allegations in the Complaints do not reach all such 
buildings, and therefore, whether the remedy addresses them is not a 
proper subject for Tunney Act review. In any event, the United States 
believes the proposed remedy is adequate to redress the likely 
competitive harm from the mergers.
---------------------------------------------------------------------------

    \25\ See, e.g., Microsoft, 56 F.3rd at 1459 (``Congress surely 
did not contemplate that the district judge would, by reformulating 
the issues, effectively redraft the complaint himself.''); id. 
(stating that the district judge may not ``reach beyond the 
complaint to evaluate claims that the government did not make''); 
BNS, 858 F.2d at 462-63 (The Tunney Act ``does not authorize a 
district court to base its public interest determination on 
antitrust concerns in markets other than those alleged in the 
government's complaint.'') Nothing in the 2004 Tunney Act amendments 
could be viewed as suggesting that the reviewing court should look 
beyond the allegations in the complaint in determining whether the 
proposed decree is in the public interest. Indeed, to do so could 
result in the court substituting its prosecutorial judgment for that 
of the United States. Were a court to reject a proposed decree on 
the grounds that it failed to address harm not alleged in the 
complaint, it would offer the United States what the Court of 
Appeals for the D.C. Circuit referred to as a ``difficult, perhaps 
Hobson's choice'': it would have to either redraft the complaint and 
pursue a case it believed had no merit, or else drop its case and 
allow conduct it believed to be anticompetitive to go unremedied. 
Microsoft, 56 F.3d at 1456.
---------------------------------------------------------------------------

a. Transport
    In its investigation, the United States examined the extent of 
AT&T's local networks in SBC's territory, and MCI's local networks in 
Verizon's territory, which the acquired firms use to provide Local 
Private Line and related services. In order to analyze the competitive 
effects of the mergers, the United States also examined the other CLEC 
networks in each metropolitan area of overlap. Using compulsory 
process, the United States obtained highly-confidential maps of fiber-
optic networks and information about ``on-net buildings'' \26\ from 
more than two dozen different CLECs. The United States found that there 
were multiple CLECs with local networks in every metropolitan area 
under consideration. Those networks vary in their scope and reach, but 
several in each metropolitan area reach the highest volume locations, 
especially central offices with sizable demand. Moreover, CLECs 
typically continue to add new locations to their networks as demand 
warrants.\27\
---------------------------------------------------------------------------

    \26\ An ``on-net'' building is a building for which a carrier 
has built or acquired its own last-mile fiber-optic connection, 
connecting the building to its network. Complaints ] 16.
    \27\ The FCC reached a similar conclusion. See, e.g., FCC Orders 
] 45 (``In many MSAs, some competitors appear to have more extensive 
networks than [AT&T/MCI]. We conclude, therefore, that there are 
existing competitors with local fiber networks that reasonably could 
provide wholesale special access in MSAs where [AT&T/MCI] now 
operates local facilities.'').
---------------------------------------------------------------------------

    Accordingly, the United States concluded that the mergers were 
unlikely to create a ``metropolitan area-wide'' competitive problem, or 
a competitive problem in the vast majority of buildings in any given 
metropolitan area.\28\ Nevertheless, because there is considerable 
differentiation in the buildings reached by different carriers 
networks, particularly for end-user buildings, in a relatively small 
number of buildings the acquired company is the only alternative to the 
RBOC \29\ for a last-mile connection. The competitive problem created 
by the mergers, therefore, involves this set of buildings.
---------------------------------------------------------------------------

    \28\ Indeed, for the vast majority of buildings in a given 
metropolitan area the SBC or Verizon is the only firm with a last-
mile connection to the building. Complaints ] 15. Accordingly, the 
merger results in no less of actual competitive options to that vast 
majority of buildings.
    \29\ The term ``RBOC'' refers to a regional Bell operating 
company, such as SBC or Verizon.
---------------------------------------------------------------------------

    As ACTel correctly points out, however, the relevant product that 
uses this connection or loop is Local Private Lines service (or value-
added services that rely on Local Private Line). What the Complaints 
therefore allege is a likelihood of harm in the markets for Local 
Private Lines, or services that rely on Local Private Lines, due to a 
reduction from two to one in the number of providers of last-mile 
connections. In other words, the market is Local Private Line, but the 
merger-created bottleneck or competitive problem alleged in the 
Complaints is the last-mile connection.\30\ In general, there is no 
such bottleneck for transport, nor do the Complaints allege a 
competitive problem specific to transport. Thus, contrary to ACTel's 
contention, there is no ``inconsistency'' between the Complaints and 
proposed Final Judgments in their treatment of transport nor are the 
proposed Final Judgments deficient because they address ``only the part 
of the Local Private Line that connects to a

[[Page 17169]]

building,'' not the transport part.\31\ It would be inappropriate to 
suggest that the remedy is inadequate because it does not address a 
competitive harm that the United States neither concluded was likely 
nor alleged in its Complaints.\32\
---------------------------------------------------------------------------

    \30\ Similarly, the proposed Final Judgments focus on 
divestiture of ``laterals'' and ``transport'' rather than Local 
Private Lines because, as ACTel acknowledges, Local Private Line is 
a product, not a specific asset. Any divestiture needs to identify 
specific assets, rather than ``products,'' in order to avoid the 
very ambiguity that would cause concern under the Tunney Act.
    \31\ Indeed, contrary to ACTel's assertion (ACTel Comment at 
16), the Complaints never even use the word ``transport.''
    \32\ ACTel argues ``the Government must look at transport on a 
`segment by segment' basis rather than via area-wide analysis.'' 
Indeed, the United States effectively did just that. Although the 
United States' investigation revealed that the vast majority of 
interoffice transport routes where AT&T or MCI is present would also 
have competitive alternatives post-merger, the United States, like 
ACTel, was concerned about any reduction of competitive options from 
two to one that could potentially result. Because an interoffice 
transport circuit is essentially a circuit to a central office 
location, the United States chose to treat ``central offices'' as 
any other building and analyzed Local Private Line connections to 
them along with all other buildings connected to AT&T's and MCI's 
networks. Ultimately, the United States identified only two SBC 
central offices and three Verizon central offices where AT&T or MCI, 
respectively, was the only connected CLEC and where entry was 
unlikely. Consistent with the United States' approach to other 2-to-
1 buildings where entry was unlikely, these five central offices are 
included in the proposed remedy and thus, to the extent that there 
is a competitive problem for the small number of transport routes 
from these central offices, the proposed Final Judgments will remedy 
it.
---------------------------------------------------------------------------

    The divestiture remedy is focused on the assets that would be 
necessary to replace the competition lost in the buildings where harm 
was anticipated as a result of the mergers: those assets are the 
laterals to the specific buildings that likely would be subject to 
anticompetitive effects. As noted in the CIS, however, lateral's are of 
little use if they are not connected to a network. Therefore, the 
proposed Final Judgments also require the divestiture of IRUs for 
transport facilities sufficient to connect the divested laterals to 
locations mutually agreed upon by Defendants and the purchaser. This 
will ensure that the purchaser can connect the laterals to its network 
facilities and provide both Local Private Lines and any other 
telecommunications services that rely on Local Private Lines that a 
customer in the building may desire.
b. Omitted 2-to-1 Buildings
    ACTel complains that the proposed Final Judgments do not cover all 
2-2- buildings. However, it incorrectly suggests that it is 
``impermissible by the express terms of the Complaint'' for the United 
States to have excluded certain 2-to-1 buildings because the Complaints 
allege harm in all 2-to-1 buildings. Nowhere do the Complaints state 
that there would be competitive harm in all 2-to-1 buildings, nor would 
the facts support such an allegation. One reason is that for some of 
the 2-to-1 buildings entry would be likely in response to a post-merger 
price increase. Indeed, the Complaints specifically list some of the 
factors governing whether a CLEC will build fiber to a particular 
building and state that ``entry may occur in response to a post-merger 
price increase in some of buildings where [AT&T or MCI] is the only 
connected CLEC.'' \33\ Similarly, the CISs also discuss entry, and 
conclude that ``[w]hile entry may occur in some buildings where [AT&T 
or MCI] is the only CLEC present in response to a post-merger price 
increase, the conditions for entry are unlikely to be met in the 
hundreds of buildings that are the subject of the Complaint[s].'' \34\ 
The Complaints did not allege, nor were intended to allege, harm in all 
2-to-1 buildings; rather the ``subject of the Complaint[s]'' is the 
subset of buildings where harm was likely and that were identified in 
the proposed Final Judgments.
---------------------------------------------------------------------------

    \33\ Complaints ] 29. ACTel cites the Complaints on entry, 
quoting the language ``entry is unlikely to eliminate the 
competitive harm that would likely result from the proposed 
merger.'' ACTel Comment at 15. That language recognizes that for the 
hundreds of buildings identified in the proposed Final Judgments 
entry is indeed unlikely, and a remedy is required. But ACTel omits 
the preceding language that acknowledges that for some of the 2-to-1 
buildings, entry may well occur. See Complaints ] 29. For these 
buildings, a remedy is unnecessary.
    \34\ CISs at 8.
---------------------------------------------------------------------------

    Ambiguity in the terms of a proposed judgment is a legitimate 
subject for consideration under the Tunney Act. 15 U.S.C. 16(e)(1)(A). 
ACTel contends that there is ambiguity ``due to discrepancy between the 
number of buildings the Proposed Final Judgment identifies and what 
publicly available data suggests in terms of the number of `2 to 1' 
loop buildings affected by the mergers.'' \35\ This ``discrepancy,'' 
however, is not an ambiguity in the terms of the proposed Final 
Judgments. The proposed Final Judgments very clearly specify the 
buildings to be divested. It is true that although the Complaints 
allege competitive harm in only a subset of 2-to-1 buildings, they do 
not specifically list the buildings in that subset. However, the set of 
buildings as to which the United States believed there was sufficient 
evidence to support a conclusion of competitive harm, and which is the 
subject of its Complaints, is the set of buildings identified in the 
proposed Final Judgments filed simultaneously with the Complaints. 
Thus, the question of whether the United States should have sought 
relief in additional 2-to-1 buildings goes not to the adequacy of the 
remedy, but rather to the United States' conclusions about where the 
mergers might cause competitive harm, and it is therefore not a proper 
subject for Tunney Act consideration.\36\
---------------------------------------------------------------------------

    \35\ ACTel Comment at 12.
    \36\ Ultimately, the United States makes two kinds of judgments. 
The first is whether and where a particular merger is likely to 
cause competitive harm; the second is whether a remedy is likely to 
be adequate to remedy the identified harm. The first is not a proper 
subject for Tunney Act review, as it would require the Court to 
substitute its prosecutorial judgment for that of the United States; 
the second is indeed a proper subject for such review, as intended 
by Congress. The United States' as to which 2-to-1 buildings pose a 
competitive problem and therefore require a remedy is fundamentally 
a judgment of the first kind, not the second.
---------------------------------------------------------------------------

    In any event, the United States believes that divestitures of 
laterals to the set of buildings identified in the proposed Final 
Judgments are sufficient to remedy any competitive harm that otherwise 
would be likely to result from the mergers. In order to identify 
buildings where the merging firms were the only carriers with a last-
mile connection (i.e., 2-to-1 buildings),\37\ the United States sought 
and received, via compulsory process, ``on-net'' building lists from 
AT&T, MCI, and over 30 other CLECs and compared those lists.\38\ The 
United States then eliminated from the resulting list of 2-to-1 
buildings those buildings where circumstances suggested that there was 
no competitive problem. For instance, because where there is no likely 
customer, there probably is no harm, the United States eliminated 
vacant buildings, buildings where a subsidiary of the merging firms was 
the only customer, and buildings with zero current demand for Local 
Private Line or related services.\39\
---------------------------------------------------------------------------

    \37\ The United States' reasons for treating differently 
buildings where at least two carriers would have a last-mile 
connection post-merger, is discussed below. See infra section 
III.A.2.c.
    \38\ In its comment, ACTel suggests that the number of 2-to-1 
buildings in each metropolitan area is in the thousands. Such 
numbers are absurdly high. For instance, ACTel's estimate that there 
are 6318 2-to-1 buildings in Los Angeles exceeds AT&T total number 
of on-net buildings in that metropolitan area (much less 2-to-1 
buildings) by more than twenty times. Contrary to ACTel's assertions 
that the number of 2-to-1 buildings in each metropolitan area is in 
the thousand buildings, the United States found that the total 
number of 2-to-1 buildings in all the alleged metropolitan areas 
combined barely reached 1,000 for the Verizon and SBC regions 
respectively.
    \39\ Of course, it is hypothetically possible that a building in 
this category could have a competitive problem, for instance, if 
post-merger a new customer moved into a vacant building. However, 
Section 7 does not look to some hypothetical possibility of harm, 
but rather to a likelihood of harm. See, e.g., New York v. Kraft 
General Foods, Inc., 926 F. Supp. 321, 358-59 (S.D.N.Y. 1995) 
(``Section 7 deals in `probability,' not `ephemeral possibilities.' 
'') (quoting United States v. Marine Bancorp., Inc., 418 U.S. 602, 
622-623 (1974))); Fruehauf Corp. v. F.T.C., 603 F.2d 345, 351 (2d 
Cir. 1979) (``[T]here must be `the reasonable probability' of a 
substantial impairment of competition to render a merger illegal 
under Sec.  7. A `mere possibility' will not suffice.'') (citations 
omitted).

---------------------------------------------------------------------------

[[Page 17170]]

    In addition, because entry is likely to occur in response to a 
price increase for some set of the 2-to-1 buildings, the United States 
considered the prospects for entry for each of the 2-to-1 buildings. As 
noted in the Complaints, two of the most important factors in 
determining whether entry is likely in a given building is the 
proximity of competitive fiber to that building, and the capacity 
required by the building.\40\ The United States sought and received 
through compulsory process the fiber maps of more than two dozen CLECs. 
Using mapping software, the United States compiled ``master'' 
electronic maps of each of the overlapping metropolitan areas. For each 
of the hundreds of buildings in question, the United States identified 
the distance to the nearest competitive fiber and compared that with 
demand data for each of the buildings. From this, the United States was 
able to make judgments about the likelihood of entry in each building. 
The buildings it chose to include in the proposed Final Judgments are 
those as to which the United States believed it could show that entry 
was unlikely, and therefore that competitive harm would be likely. 
Accordingly, the divestitures required by the proposed Final Judgments 
reflect the set of 2-to-1 buildings where competitive harm was likely, 
and should be adequate to remedy the mergers' likely anticompetitive 
effects.
---------------------------------------------------------------------------

    \40\ Complaints ]] 27-28. The closer a building is to a 
competitor's fiber, the less it is likely to cost that competitor to 
install additional fiber to reach that building (since typically a 
major component of the cost of installing fiber is the cost of 
digging up city streets to lay new fiber-optic cable and that cost 
increases with distance). The larger the demand for capacity in a 
building, the greater the expected revenues. The decision of a 
carrier whether to enter a building often turns on the extent to 
which the expected revenue exceeds the construction cost. See also 
CISs at 8.
---------------------------------------------------------------------------

c. Anticompetitive Effects Beyond 2-to-1 Loops
    ACTel alleges that the proposed remedy does not fix the ``many 
`anticompetitive effects' in Private Line situations beyond `2 to 1' 
loops'' \41\ such as buildings where the number of providers would go 
from four to three to two. The Complaints, however, do not allege a 
competitive problem as a result of reducing the number of competitors 
serving a building from four to three, or three to two.\42\ Indeed, 
ACTel acknowledges this, suggesting that the United States has done 
``an about-face'' by not alleging a competitive problem in those 
instances in its Complaints. Because the United States did not conclude 
that there was likely to be a competitive problem in 4-to-3 or 3-to-2 
buildings, there is no reason to have included such buildings in the 
proposed remedy.
---------------------------------------------------------------------------

    \41\ ACTel Comment at 21.
    \42\ ACTel's comment incorrectly cites the Complaints. It 
alleges that ``according to the Complaint AT&T and MCI are the most 
significant competitors for SBC and Verizon,'' ACTel Comment at 21, 
and state that ``AT&T and MCI are the most significant and effective 
competitors to the acquiring companies,'' Id. at 23. In both cases 
it cites to paragraph 17 of the Complaints. Paragraph 17, however, 
makes no such allegations. Instead, it makes the more limited 
allegations that AT&T and MCI are, respectively ``among the leading 
CLECs'' in the number of buildings connected to their networks, and 
that for hundreds of buildings, the merging firms are the only two 
carriers that own or control a direct building connection.
---------------------------------------------------------------------------

    In many markets, a merger reducing the number of competitors from 
three to two or four to three is a competitive problem and the United 
States does not hesitate to bring such cases. To conclude, however, 
that a merger is anticompetitive simply because the number of 
competitors is reduced from, e.g., three to two, is incorrect. Many 
other considerations relating to market structure are also relevant. 
Before coming to a judgment on the competitive effect of a merger, the 
United states evaluates whether coordinated or unilateral effects are 
likely,\43\ whether entry likely will occur, and whether a merger will 
generate efficiencies.\44\ Here, given the particular structure of the 
marketplace, in looking at buildings where the number of competitors 
went from three to two or four to three, the United States was unable 
to conclude that the mergers would significantly increase the risks of 
coordinated interaction. Moreover, largely because the merging firms 
were not especially close substitutes, the evidence did not support a 
finding of likely unilateral anticompetitive effects in these 
buildings. Finally, the fact that at least two CLECs has added the 
buildings in question to their networks suggested that the 
characteristics of the buildings (e.g., location, capacity demand) made 
them susceptible to entry--significantly more so than the 2-to-1 
buildings.\45\ Thus, after almost nine months of analysis, and 
consideration of millions of pages of material and hundreds of 
interviews, the United States determined that the evidence did not 
support alleging a competitive problem in the 3-to-2 or 4-to-3 
buildings in the SBC and Verizon territories; the likely competitive 
problem is limited to the provision of Local Private Line and related 
services in certain 2-to-1 buildings. That is the only competitive harm 
alleged in the Complaints, and the only harm that the proposed Final 
Judgments properly remedy.\46\
---------------------------------------------------------------------------

    \43\ United States Department of Justice & Federal Trade 
Commission, Horizontal Merger Guidelines, (rev. Apr. 8, 1997) Sec.  
2, available at http://www.usdoj.gov/atr/public/guidelines/hmg.htm.
    \44\ Id. Sec. Sec.  3, 4. Thus, ACTel's contention that the 
United States' decision to allege only a problem in certain 2-to-1 
buildings is an ``about-face'' and represents a ``significant 
departure from established and documented procedures'' is without 
merit. Merger analysis is a complex, fact-specific, case-by-case 
undertaking and one which cannot simply be resolved by looking only 
at the change in concentration or the number of remaining 
competitors in a market. See, e.g., id. Sec.  0 (``Because the 
specific standards set forth in the Guidelines must be applied to a 
broad range of possible factual circumstances, mechanical 
application of those standards may provide misleading answers to the 
economic questions raised under the antitrust laws.''); see also 
United States v. Continental Can Co., 378 U.S. 441, 458 (1964) 
(``Market shares are the primary indicia of market power but a 
judgment under Sec.  7 is not to be made by any single qualitative 
or quantitative test. The merger must be viewed functionally in the 
context of the particular market involved, its structure, history 
and probable future.'').
    \45\ In arguing that the mergers present competitive problems in 
Local Private Lines beyond the limited number of 2-to-1 situations 
alleged by the United States, ACTel relies heavily on information it 
and its members submitted to the Department and FCC. The Department 
devoted significant time to analyzing this date. But based on this 
analysis, as well its consideration of the large volumes of other 
information gathered during the course of the investigation, the 
Department could not draw the same conclusions as ACTel seeks to 
draw. Nor, apparently, could the FCC. See. e.g., FCC Orders ] 46.
    \46\ The FCC, which conducted its own in-depth analysis of the 
transactions, reached a consistent conclusion. FCC Orders ] 40 (``We 
find that the terms of the consent decree should adequately remedy 
any likely anticompetitive effects in the provision of Type I 
wholesale special access services.'').
---------------------------------------------------------------------------

d. Divestiture Purchaser
    ACTel does raise one point that goes directly to the adequacy of 
the proposed remedy. It argues that a purchaser of the divested assets, 
even if it is a ``viable, ongoing telecommunications business,'' may 
not be an effective competitive substitute for AT&T and MCI at least, 
in part, because its network would not be as broad, nor its customer 
base as ``robust.'' It is, indeed, important for the success of the 
proposed remedy that the divestiture buyer be able to replace the 
competition that might otherwise be lost as a result of the merger. For 
that reason, the proposed Final Judgments require that the purchaser, 
and terms of the purchase, be subject to the United States' approval. 
As the CISs note, in scrutinizing the proposed purchaser(s), ``the 
United States will be particularly focused on the purchaser's ability 
to be a viable competitor in offering Local Private Lines on both a 
retail and/or wholesale basis.'' CISs at 9.
    In each metropolitan area under consideration there are at least 
several

[[Page 17171]]

CLECs with extensive networks, including, e.g., switches, fiber, dozens 
or hundreds of``on-net'' locations. Those carriers are already 
effective competitors in the metropolitan area. Where those carriers 
are not currently effective is the specific buildings here the acquired 
firm has fiber and they do not. The proposed remedy, by providing 
another carrier with fiber-optic capacity to these buildings, will 
enable it to replace the competition that could be lost as a result of 
the merger. Even if the purchaser's pre-existing network is not as 
extensive as the acquired firm's, as long as it has all the assets 
necessary to be able to reliably provide service to the buildings in 
question, there is little reason to believe that the purchaser would 
likely be a less aggressive, effective competitor for those buildings. 
In short, the United States believes that there are potential 
purchasers who could effectively use the assets to compete, and intends 
to exercise its approval rights to approve only such purchasers.\47\
---------------------------------------------------------------------------

    \47\ This does not mean that only a carrier with an extensive 
pre-existing network could be acceptable as a purchaser. Depending 
on the assets the carrier is purchasing from the merged firm in the 
particular metropolitan area, its plans to build or acquire other 
assets, its existing customer base, its business plan, etc., an 
established carrier without a pre-existing network in the 
metropolitan area in question might also be acceptable as a 
purchaser.
---------------------------------------------------------------------------

(e) Alternate Remedies
    Because the United States' proposed remedy adequately redresses the 
competitive harm alleged in its Complaints, there is no need to 
consider the remedies proposed by ACTel in its comment. Moreover, some 
of its proposed remedies could raise difficult issues.\48\ That the 
proposed Final Judgments do not include ACTel's suggested remedies in 
no way suggests that they fail to fall within the reaches of the public 
interest.
---------------------------------------------------------------------------

    \48\ For instance, their proposal that the merged firm divest 
all duplicative ``loop and transport circuits'' could cause 
significant customer disruptions as discussed further, see infra 
Sections III.B.2.b, III.B.2.c.i.
---------------------------------------------------------------------------

B. COMPTEL

1. Summary of Comment
    COMPTEL, a trade association of communications providers that 
compete against the merging firms and also purchase wholesale services 
from them, submitted a comment on February 13, 2006, objecting to the 
proposed Final Judgments because, in its view, they ``do not replace 
the competition lost from the elimination of AT&T and MCI as the two 
most significant competitors to SBC and Verizon.'' \49\ COMPTEL's 
comment begins by summarizing, and criticizing, the United States' 
Complaints. In particular, it contends that the geographic market 
alleged by the United States is too narrow and ``cannot plausibly be 
considered to be as small as an individual building.'' \50\ Moreover, 
it suggests that there are barriers to entry in addition to those 
alleged in the United States' Complaints, and that barriers to entry 
apply not just to buildings, but to entry into a metropolitan area as 
sell. COMPTEL suggests that a ``post-merger price increase in the 
metropolitan area is just as much (actually more) of a danger than the 
threat of building-specific price increases'' and contends that the 
proposed remedy would not prevent those increases.\51\
---------------------------------------------------------------------------

    \49\ COMPTEL Comment at 2 (attached hereto as Attachment 2). 
COMPTEL also filed a Motion to Intervene on February 8, 2006, 
raising essentially the same concerns regarding the proposed Final 
Judgments as are expressed in its comments.
    \50\ Id. at 8.
    \51\ Id. at 12.
---------------------------------------------------------------------------

    COMPTEL's comment also addresses the proposed remedy specifically, 
arguing that it is inconsistent with the United States' merger and 
remedy guidelines. It suggests that a divestiture of laterals to only 
certain 2-to-1 buildings is inadequate and that, instead, the merged 
firms should be required to divest ``all of the AT&T and MCI network 
assets that serve each metropolitan area.'' Next, COMPTEL contends that 
the proposed remedy is faulty because it requires only the divestiture 
of currently unused fiber-optic strands to the buildings in question, 
and without a guaranteed customer or revenue stream, a proposed 
purchaser would be unwilling to commit the capital to purchase the 
assets and install equipment needed to ``light'' the fiber-optic 
strands in questions and make them ready to use. Third, COMPTEL argues 
that the form of the proposed divestitures--10-year IRUs--is inadequate 
to resolve the competitive concerns. Finally, COMPTEL suggests that the 
remedy is not ``clear and enforceable'' because some terms of the 
divestiture (pricing, splice points, and transport) are left to 
negotiation between the merged firms and divestiture buyers.
    The final section of COMPTEL's comment complains that certain RBOC 
contracting practices are serving as a barrier to entry, and that the 
combined effect of the mergers and the contracting practices will be to 
enhance the risks of anticompetitive coordination between the two 
surviving firms. COMPTEL suggests that the proposed remedy would 
compound this problem if AT&T (as the merged SBC/AT&T is now known) 
were to buy the divested assets from Verizon and vice versa. COMPTEL 
argues in favor of an alternate remedy that would require the merged 
firms to divest all the acquired companies' ``in-region assets''--
including customers and employees--and would also eliminate certain 
contracting practices.
2. Response
    Like ACTel's comment, some of COMPTEL's comment criticizes the 
United States' Complaints rather than the adequacy of the remedy for 
the harm alleged in the Complaints. In particular, COMPTEL criticizes 
the Complaints' geographic market definition as well as the decision 
not to include any allegations of ``metropolitan-area-wide harm,'' harm 
due to coordinated interaction between the two merged firms, or harm 
due to RBOC contracting practices. However, the proposed Final 
Judgments should not be viewed as inadequate because they fail to 
address competitive harm not alleged in the Complaints. COMPTEL also 
raises concerns that do go to whether the proposed remedy is sufficient 
to rectify the competitive harm alleged in the Complaints. However, the 
United States believes that the proposed remedy will adequately redress 
the alleged competitive harm and will do so in a manner that avoids 
disruptions or dislocations of the ultimate retail enterprise customers 
whose businesses depend on reliable telecommunications service.
a. Metropolitan Area Harm
    COMPTEL contends that the proper geographic market definition 
cannot be as small as an individual building. It suggests that the 
market is much broader, and that the harm the mergers cause is likely 
to be felt throughout the metropolitan area, rather than just in the 
specific buildings identified in the United States' papers. This 
concern is, primarily, a challenge to the United States' Complaints 
rather than the proposed remedy and, as previously noted, Tunney Act 
review properly addresses the proposed remedy, not the correctness of 
the Complaints' allegations of geographic market or competitive harm.
    In any event, the market definition is correct, and markets can be 
as narrow as the individual building.\52\ As COMPTEL

[[Page 17172]]

notes, the United States defines markets primarily from the demand 
perspective, i.e., what options face the customer.\53\ Customers for 
Local Private Lines can select only from the set of providers that 
offer service to the particular building those customers need to 
connect. Although RBOC networks are typically ubiquitous and reach 
virtually every building in their franchised territories, CLECs, 
including AT&T and MCI, directly connect to only a small minority of 
buildings. Because the set of providers varies from building to 
building, and because a customer for a Local Private Line cannot 
substitute a circuit to a different building to supply the one it needs 
to connect, the relevant geographic market for Local Private Lines can 
indeed be the individual building.\54\
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    \52\ The FCC also concluded that the geographic market is the 
individual building. FCC Orders ] 28 (stating that ``the relevant 
geographic market for wholesale special access services is a 
particular customer's location''). It also is worth noting that even 
the statement of Dr. Farrell, submitted on behalf of Global Crossing 
in the FCC's SBC/AT&T merger proceeding and attached to COMPTEL's 
comment as Exhibit E, recognizes that markets as narrow as 
individual buildings would be an appropriate way to analyze the 
geographic markets here. See Statement of Joseph Farrell ]] 10-14 
(Apr. 25, 2005).
    \53\ COMPTEL Comment at 10; Horizontal Merger Guidelines Sec.  
1.0.
    \54\ That a customer might need Local Private Lines to multiple 
locations does not in itself change this analysis. For instance, a 
customer's need for connections to three locations within a given 
metropolitan area does not necessarily mean the geographic market is 
the metropolitan area. The customer may simply be an active 
purchaser in three different markets. In fact, wholesale customers--
such as those that constitute COMPTEL--often will purchase from 
multiple providers of Local Private Lines in a given metropolitan 
area, relying on the RBOC for the majority of their circuits, but 
purchasing from lower priced CLECs for the locations to which the 
CLECs can provide service. The fact that the wholesale customers may 
have ``master service agreements'' with carriers that cover a whole 
metropolitan area and specify the terms under which circuits are 
purchased does not change the fact that their competitive 
alternatives (and hence, prices) vary by building, and they may (and 
often do) choose to purchase circuits on a building-by-building 
basis.
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    Regardless, however, of whether the appropriate geographic market 
here is as narrow as the individual building or as broad as the 
metropolitan area,\55\ the competitive harm likely to result from the 
proposed merger is limited to a set of 2-to-1 buildings, and that is 
what the Complaints allege.\56\ In the vast majority of buildings, the 
RBOC is the only firm owning a last-mile connection, and the merger 
does not change this. For most of the small percentage of buildings 
where AT&T or MCI is present as a competitive option, either another 
CLEC is also present or circumstances are such that entry would be 
likely in response to a price increase. Therefore, for these buildings 
also the evidence is insufficient to establish that the merger will 
likely lead to competitive harm. Only in the set of 2-to-1 buildings 
for which the United States sought a remedy did it conclude that the 
evidence was sufficient to show that the merger would likely lead to 
competitive harm. COMPTEL's contention that the remedy is insufficient 
because it does not address the concern that the mergers will lead to 
price increases throughout all the buildings in a metropolitan area is 
therefore without merit: The evidence did not show that such increases 
were likely,\57\ the United States did not allege such increases, and 
therefore there was no reason to seek relief to prevent such increases.
---------------------------------------------------------------------------

    \55\ Because there are also some facts that suggest broader 
markets, the United States' Complaints acknowledge that the 
geographic market may be as broad as the metropolitan area. 
Nevertheless, if the market is as broad as the metropolitan area, 
then the market is highly geographically differentiated, with 
different carriers able to reach very different sets of locations 
and buildings within the area.
    \56\ See, e.g., Complaints ] 25 (alleging that the merging 
parties ``are the only two carriers that own or control a Local 
Private Line connection to many buildings in each region. The merger 
would, therefore, effectively eliminate competition for facilities-
based Local Private Line service to those buildings'') (emphasis 
added); see also CISs at 10 (``[T]here are numerous buildings where 
[AT&T or MCI] is the only CLEC with a last-mile connection. It is 
the decreased competition in the provision of these last-mile 
connections to buildings where [AT&T or MCI] is the only CLEC that 
creates the harm alleged in the Complaint * * *. [D]ivesting these 
last-mile connections will restore the lost facilities-based 
competition.'').
    \57\ As COMPTEL notes, often a particular carrier's default 
pricing for Local Private Lines covers an entire metropolitan area. 
However, given that in each metropolitan area in question, AT&T or 
MCI were each only one of multiple CLECs with local networks and 
typically controlled no more than a small minority of CLEC on-net 
connections, the evidence did not show that elimination of AT&T or 
MCI as an independent competitor would lead to ``metropolitan area-
wide'' anticompetitive price effects; the likely anticompetitive 
effect could be no broader than certain individual buildings.
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b. Divestiture of Specific Assets Versus an Operating Business
    COMPTEL complains that the proposed remedy is inadequate to resolve 
the harm alleged in the Complaints because it achieves the divestiture 
of only specific assets (laterals to certain 2-to-1 buildings), rather 
than an entire operating business. It contends that this is in 
violation of the United States' remedy guidelines.\58\ COMPTEL's 
position, however, than an entire operating business needs to be 
divested here appears largely based on its erroneous assertion that the 
likely competitive harm extends beyond a limited set of 2-to-1 
buildings. To the extent that COMPTEL's argument is that an entire 
operating business needs to be divested in order to resolve the 
competitive harm in the specific 2-to-1 buildings identified in the 
United States' papers, that contention is meritless.
---------------------------------------------------------------------------

    \58\ COMPTEL Comment at 14; see U.S. Dep't. of Justice, 
Antitrust Div., Antitrust Division Policy Guide to Merger Remedies, 
Sec.  I (Oct. 2004) (``Remedy Guide'') available at http://www.usdoj.gov/atr/public/guidelines/205108.pdf. (``This Guide is a 
policy document, not a practice handbook. It is not a compendium of 
decree provisions, and it does not list or give `best practices' or 
the particular language or provisions that should be included in any 
given decree.''). Although the Remedy Guide is not binding, the 
proposed remedy here is entirely consistent with the Remedy Guide. 
As the Remedy Guide notes, the fact that a provision was included in 
prior settlements does not make it necessarily appropriate for new 
ones; each matter must be evaluated on a case-by-case basis. Id.
---------------------------------------------------------------------------

    The purpose of any remedy is to avoid harm to competition that 
would otherwise be created by the merger. Here, AT&T and MCI are being 
eliminated as independent competitors in the respective RBOC regions 
for Local Private Lines and value-added services that rely on Local 
Private Lines. But the competitive problem is not a dearth of providers 
of these services in the specified metropolitan areas; indeed, each 
metropolitan area in question has several competitive providers of 
Local Private Lines and value-added services that rely on Local Private 
Lines. The problem here is there are some buildings in each 
metropolitan area to which AT&T or MCI can offer fully facilities-based 
Local Private Line and related services but that to which no other CLEC 
can, or would be likely to, offer such services post-merger. An 
effective remedy in this instance, therefore, does not necessitate 
creating an entirely new competitor offering Local Private Line and 
related services in each metropolitan area, but rather can be limited 
to a divestiture that would allow an existing carrier to provide fully 
facilities-based Local Private Line and related services to the 
particular set of buildings in which the merger would otherwise be 
likely to harm competition.\59\ Accordingly, a remedy that gives an 
already viable CLEC the fiber-optic capacity to serve the buildings in 
question on acceptable

[[Page 17173]]

terms resolves the competitive harm. A divestiture of an entire 
``operating business'' is unnecessary.\60\ The only question is whether 
the particular assets that the divestiture buyer must receive under the 
proposed Final Judgments, and the terms by which those assets are 
conveyed, are sufficient to allow the buyer to compete effectively in 
the buildings in question. As discussed further below, the United 
States believes that the proposed Final Judgments adequately resolve 
these issues.
---------------------------------------------------------------------------

    \59\ See, e.g., Remedy Guide Sec.  III.C.2 (``Divestiture of 
Less than an Existing Business Entity Also May Be Considered When 
Certain of the Entity's Assets Are Already in the Possession of, or 
Readily Obtainable in a Competitive Market by, the Potential 
Purchaser.''). Here, essentially all the assets necessary to compete 
in the problematic buildings are already in the hands of, or readily 
obtainable by, numerous potential purchasers--except the fiber-optic 
connections to those buildings. For recent cases in which the United 
States has required divestiture of only certain assets rather than 
an entire operating business, see United States v. Cal Dive Int'l, 
Inc., No. 1:05CV02041 (EGS) (D.D.C. Jan. 12, 2006) (order entering 
final judgment requiring divestiture of two vessels and a saturation 
diving system), available at http://www.usdoj.gov/atr/cases/f213100/213177.htm; United States v. Cingular Wireless Corp., No. 
1:04CV01850 (RBW) (D.D.C. Mar. 14, 2006) (order entering final 
judgment requiring, in certain markets, divestiture of wireless 
spectrum only), available at http://www.usdoj.gov/atr/cases/f208000/208093.htm.
    \60\ Divestiture of an entire ``operating business'' or 
``business unit'' is not only unnecessary here, but also 
impractical. Neither AT&T nor MCI have separate, easily severable 
``business units'' that operate the Local Private Line business is 
the metropolitan areas in question. The manner in which the 
respective corporations are organized would make it very difficult 
to implement an effective divestiture of an entire ``operating 
business'' here. Moreover, such a divestiture could cause 
substantial customer disruption. See infra Section III.B.2.c.i.
---------------------------------------------------------------------------

c. Concerns Regarding the Assets To Be Divested
    COMPTEL contends that the divestiture of unused capacity to the 
buildings in question in the form of ten-year IRUs is inadequate to 
resolve the competitive concerns alleged in the Complaints. This raises 
several separate but related issues regarding the proposed remedy: (a) 
Whether it is sufficient to divest fiber-optic capacity (as opposed to 
also divesting customers); (b) whether it is sufficient to divest 
``unused'' capacity, i.e., ``unlit'' fibers; (c) whether a divestiture 
in the form of an IRU, instead of ownership, is sufficient, and (d) 
whether ten years is a sufficiently long IRU term. The United States 
considered each of these issues in its negotiation of the remedy. 
Ultimately, the United States concluded that the provisions of the 
proposed Final Judgments are sufficient to redress the competitive 
harm. Events since the filing of the proposed Final Judgments have 
helped confirm the United States' judgment, and should serve to 
reassure the Court as to the adequacy of the proposed remedy.
    As a result of the proposed mergers, customers for Local Private 
Line and related services to certain buildings will lose their only 
alternative to SBC or Verizon. The purpose of the divestiture remedy is 
to ensure that if and when those customers seek a provider for the 
relevant services, another competitive carrier will be able to supply 
them. That purpose will be achieved if another carrier acquires 
sufficient AT&T or MCI assets to service the buildings in question. 
However, another carrier will only purchase the divested assets if they 
present a viable business opportunity. Therefore, the divestiture 
package must be one a carrier would be willing to buy. COMPTEL's 
criticisms of the proposed divestiture properly address whether any 
buyer would be willing to purchase and operate the assets under the 
proposed terms (e.g., ``unlit'' fibers, without customers, on an IRU 
basis, for only ten years).
    The United States believes that the proposed terms are adequate to 
secure a viable buyer for the assets. Since the United States agreed to 
the divestiture terms, the divestiture process itself has helped to 
validate their adequacy. Both AT&T and Verizon are well into the 
process of auctioning the divestiture assets in question.\61\ 
Affidavits that both have filed with the United States pursuant to 
Section IV(B) of the Stipulations and Section IX of the proposed Final 
Judgments indicate that there has been substantial interest in the 
divestiture assets: multiple carriers have submitted proposals for 
some, or all, of the AT&T and MCI assets. The bids cover every 
metropolitan area identified in the proposed Final Judgments. In the 
case of AT&T (which began the divestiture process earlier than did 
Verizon), definitive agreements have already been reached with three 
different well-established carriers that would cover divestiture of all 
the assets in question.\62\ That several CLECs have bid to purchase and 
operate the assets, and the AT&T has already been able to reach 
definitive agreements to divest all its required assets, should help 
allay any concerns about whether the terms of the proposed divestiture 
are sufficient to attract viable buyers.\63\
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    \61\ In order to secure a prompt remedy, the proposed Final 
Judgments require a divestiture within 120 days after the closing of 
the respective acquisitions, or within five (5) days after notice of 
the entry of final judgment by the Court, whichever is later. 
Proposed Final Judgments Sec.  IV(A).
    \62\ On February 20, 2006, AT&T entered into definitive 
agreements to divest the assets in Los Angeles and Chicago to one 
carrier, and the assets in Detroit, Hartford, Kansas City, 
Milwaukee, San Francisco, and St. Louis to another. On February 21, 
2006, AT&T entered into a definitive agreement to divest the San 
Diego, Dallas, and Indianapolis assets to a third carrier. The 
United States has not yet determined whether to approve these 
purchases, pursuant to Section IV(A) of the Stipulation and Section 
VI(C) of the proposed Final Judgment.
    \63\ If the United States is wrong about whether the terms of 
the proposed divestiture are attractive enough to prompt a carrier 
to purchase the assets in any given metropolitan area, then after 
both the defendant(s) and trustee have failed to sell the assets, 
the trustee will file a report with the Court, the United States 
will make recommendations, and the Court ``shall enter such orders 
as it shall deem appropriate to carry out the purpose of the Final 
Judgment.'' Proposed Final Judgments Sec.  V.G. Such orders could 
alter the terms of the divestitures, or the nature of the assets, in 
such a way as to make the divestiture viable.
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(i) Capacity Without Customers
    As COMPTEL has noted, the United States often requires the 
divestiture of customers in antitrust remedies.\64\ Nevertheless, such 
a divestiture is not always necessary or appropriate. Here, because 
there are multiple providers of Local Private Line and related services 
in each metropolitan area, the set of divestiture assets could be 
relatively narrow: a purchaser could serve the potentially problematic 
buildings simply by acquiring ``last-mile'' fiber-optic capacity 
connected to its local network. Because fiber-optic capacity will be 
sold to an established CLEC, there is little concern that the purchaser 
would not be competitively viable without also receiving customer 
contracts. A divestiture of customers would be necessary or appropriate 
in this case only if no adequate purchaser were willing to take on the 
assets in the absence of some sort of guaranteed revenue stream. From 
its investigation, the United States concluded that purchasers would be 
willing to take on the assets, even without customers, on the 
assumption that they would be able to compete for, an and win, 
customers over time in the buildings at issue. The fact that multiple 
CLECVs--including members of COMPTEL--submitted bids for these assets 
(and, in AT&T's case, have agreed to purchase the assets) helps confirm 
this.\65\
---------------------------------------------------------------------------

    \64\ See, e.g., Remedy Guide Sec.  III.B (``In markets where an 
installed base of customers is required in order to operate at an 
effective scale, the divested assets should either convey an 
installed base of customers to the purchaser or quickly enable the 
purchaser to obtain an installed customer base.'')
    \65\ In this instance, a divestiture of customers might cause 
substantial disruption and complication--far more than in the 
ordinary antitrust settlement. Among other things, shifting a 
portion of a customer's telecommunications service risks outages, 
something particularly worrisome given the extent to which many 
retail enterprises depend on reliable telecommunications service. 
Had the United States sought to include a customer divestiture as 
part of the proposed remedies, it could well have run afoul of the 
Tunney Act's concern that the proposed remedy not adversely affect 
third parties. 15 U.S.C. 16(e)(1)(B) (requiring court to consider 
the impact of entry of the judgment ``upon the public generally''), 
see also Microsoft, 56 F.3d at 1462 (suggesting the Tunney Act 
analysis should consider whether ``third parties * * * would be 
positively injured by the decree'').
---------------------------------------------------------------------------

(ii) Unused Capacity Versus ``Lit'' Fibers
    COMPTEL correctly notes that purchasers of the divested assets will 
receive unused capacity to the point of entry of each building, and, in 
order to begin serving customers, would have to invest some capital to 
gain building entrance and activate (``light'') the fibers. COMPTEL's 
analogy to the cost of constructing entirely new ``last-mile'' 
connections, however, and its

[[Page 17174]]

contention that these entrance and activation costs would prevent the 
remedy from being effective, are misplaced.
    Although costs vary widely, the cost of gaining building entrance 
and activating fibers is typically a small fraction of the cost of 
constructing an entirely new ``last-mile'' connection often an order of 
magnitude less. Optronics equipment (equipment to light fiber) may not 
be cheap, but its still typically does not cost anywhere near as much 
as digging up city streets and laying new fiber. Moreover, whereas most 
of the cost of a new ``last-mile'' connection is sunk (i.e., it cannot 
be recouped once committed), much of the cost of optronics equipment is 
not generally sunk because the carrier can remove the equipment and use 
it elsewhere if it is no longer needed in its original location. 
Accordingly, the evidence gathered by the United States revealed that 
whereas carriers do not typically ``build out'' (i.e., build a new 
last-mile connection) to a customer without a relatively large 
guaranteed revenue commitment, they typically do light fiber and 
negotiate entrance to buildings connected to their network with unlit 
fiber if they are able to secure a customer of even modest capacity 
needs.
    As COMPTEL suggests, for each building in question, the buyer of 
the divested assets may not negotiate a building entrance agreement or 
activate a fiber lateral until it has secured a customer in the 
building. But that does not negate the effectiveness of the remedy. The 
buyer of the divested assets can bid to supply Local Private Line and 
related services to the building in question, and if it prevails, 
negotiate building entrance and activate the fiber. The CLECs who have 
bid for the assets in all likelihood plan to do exactly that.\66\ 
Customers for Local Private Line and related services will thereby have 
the benefits of competition, even if the divestiture purchaser 
ultimately does not win a customer contract, or ``light'' the fiber in 
their particular building.
---------------------------------------------------------------------------

    \66\ The United States also concluded that any attempt to divest 
``lit'' capacity would have been unduly complicated and problematic. 
For instance, splicing ``lit'' fibers out of the seller's network 
and into the buyer's would raise the prospect of customer outages. 
On a similar note, if the proposed Final Judgments had required the 
merged firm to provide the purchasers with fiber into the building, 
as opposed to simply to it, the merged firm might have to negotiate 
entrance agreements with hundreds of landlords on behalf of a third 
party who might not need entrance agreements for all those buildings 
until some time in the future. Perhaps more importantly, the 
divestiture buyer could well have ended up paying lease or entrance 
fees for countless buildings where it had no customers, greatly 
adding to the carrying costs of the fiber and making the divestiture 
assets much less attractive as a business proposition. The better 
approach was to simply let the buyers negotiate their own building 
entrance agreements, on their own terms, and better suited to their 
specific needs, for each building if and when they need it (i.e., if 
and when they win a customer in that building).
---------------------------------------------------------------------------

(iii) IRU Versus Ownership
    COMPTEL characterizes the form of the divestiture as a ``lease'' 
and suggests that it will be ineffective because it is not full 
ownership. Although COMPTEL is correct in that the remedy does not 
require transfer of full ownership, IRUs, which carry broader rights 
than typical leases, are commonly used in the industry and often viewed 
as almost indistinguishable from ownership. In fact, many CLECs' 
metropolitan area networks--including some of those of pre-merger 
AT&T--are constructed largely from IRU fiber rather than owned fiber. 
In its investigation, the United States did not uncover any significant 
evidence suggesting that conveying laterals in the form of IRUs would 
undermine the effectiveness of the remedy.
(iv) Ten-Year Duration
    COMPTEL complains that the required minimum term of the IRU--ten 
years--is ``relatively short'' and will impair the effectiveness of the 
remedy. The United States disagrees. Retail agreements for Local 
Private Line and related services are virtually always much shorter 
than ten years; typically they are no more than two or three years. The 
fact that the IRUs are for ten years should not impair the ability of 
the divestiture purchaser to compete except, perhaps, near the end of 
the ten-year term. At that point, it is impossible to predict what the 
competitive landscape will look like, especially in the rapidly 
changing telecommunications industry. It is for that reason that the 
United States' consent decrees--including those proposed here--do not 
extend beyond ten years. The United States cannot, with confidence, 
predict whether the mergers would continue to cause anticompetitive 
harm beyond ten years in the future, as technological or other changes 
could substantially reshape the industry. Therefore, the remedy cannot 
be faulted for not extending beyond ten years.\67\
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    \67\ It is also worth noting that fiber-optic cable does not 
last forever. The useful life of that fiber may be no more than 20 
to 25 years. It is possible, if not likely, that much of the AT&T 
and MCI fiber at issue here may have been laid ten or more years 
ago. Thus, in many cases, in 10 years time, much of the divestiture 
fiber may be nearing the end of its useful life and there would be 
little purpose in requiring an IRU significantly longer than ten 
years.
---------------------------------------------------------------------------

(v) Negotiable Terms
    COMPTEL suggests that the remedy is not ``clear and enforceable'' 
because some terms of the divestiture (pricing, splice points, and 
transport) are left to negotiation between the merged firm and 
divestiture buyer. In any divestiture, however, many of the terms need 
to be negotiated between the seller and buyer. Indeed, the United 
States never specifies a purchase price in its settlements. The 
requirements of the proposed Final Judgments here are ``clear and 
enforceable'': the merged firms must divest laterals to more than 700 
specific addresses and sufficient transport to connect those laterals 
to the buyer's network. The United States has no reason to believe that 
the negotiation of a commercial, arms-length agreement between the 
merged firms and divestiture buyers are likely to lead to any unusual 
problems.\68\ In fact, the evidence to date is otherwise: AT&T has 
already submitted to the United States for approval definitive 
agreements for the divestitures required by the proposed Final Judgment 
with the terms fully resolved. Of course, should there be any 
difficulties, the ultimate terms of the divestiture must be acceptable 
to the United States.\69\
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    \68\ Indeed, because of the relative simplicity of the remedy 
here, the agreements between the merged firms and divestiture buyers 
are likely to be much less complex and potentially problematic than 
many other divestitures, which typically can involve difficult 
issues regarding, e.g., transition agreements, intellectual property 
transfer, ``splitting up'' of customer contracts, arrangements for 
employees.
    \69\ Proposed Final Judgments Sec.  VI(C).
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d. Contracting Practices and Coordination
    COMPTEL complains at length that certain RBOC contracting practices 
are serving as a barrier to entry, and that, in its view, the combined 
effect of the mergers and the contracting practices will be to enhance 
the risks of anticompetitive coordination between the two surviving 
firms. As part of its investigation the United States, of course, 
considered potential entry barriers in the markets in question 
(including RBOC contracting practices) as well as the possibility that 
the mergers could enhance the risks of collusion. Whatever the entry 
barrier that may be posed by RBOC contracting practices, the mergers do 
nothing to enhance them. Nor have such contracts served to prevent 
multiple CLECs from building networks, entering markets, and selling 
significant volumes of, both wholesale and retail, Local Private Lines 
and related services. To the extent that AT&T and MCI were successful 
in

[[Page 17175]]

selling Local Private Lines and related services to the buildings in 
question, the divestiture purchaser could be as well.
    As for coordination, the United States was unable to conclude that 
the change in market structure brought on by the mergers was likely to 
lead to competitive harm due to an increased risk of coordination.\70\ 
The existence of numerous competitors (in addition to the merging 
firms) for both wholesale and large retail telecommunications customers 
tends to make collusion difficult. In any event, the United States' 
Complaints did not make any allegations regarding RBOC contracting 
practices or anticompetitive coordination, and hence, COMPTEL's 
concerns are beyond the scope of the Complaints and have essentially 
nothing to do with whether the proposed remedy resolves the competitive 
harm alleged by the United States.\71\
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    \70\ The FCC reached a similar conclusion. FCC Orders ] 52 (``We 
also do not believe that the merger increases the likelihood of 
coordinated interaction.''); see also id. 54.
    \71\ COMPTEL's sole basis for arguing that the contracting 
practices and coordination are relevant to the remedy is its 
allegation that if Verizon buys the divested AT&T assets, and vice 
versa, that may compound the competitive harm COMPTEL alleges. 
Putting aside the questionable merit of these claims, as discussed 
above, the merging firms have already solicited and received bids 
for the assets in question as required under the proposed Final 
Judgments, and Verizon did not bid for the AT&T assets nor did AT&T 
bid for the MCI assets that Verizon is divesting. Thus, COMPTEL's 
concern appears to be moot.
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C. New York Attorney General

1. Summary of Comment
    On February 13, 2006, the New York Attorney General (``NYAG'') 
submitted a comment arguing that the proposed remedies are ``unlikely 
to constrain the merged entities,'' \72\ in particular, because (a) 
they did not address the effect of the mergers on Internet access, and 
(b) they inadequately addressed the competitive concerns as to Local 
Private Lines. With respect to the former, NYAG argues that the 
proposed Final Judgments are faulty because they do not require the 
merged firms to offer DSL on a stand-alone basis to consumers (i.e., 
without also requiring consumers to subscribe to telephone service), 
and because they do not require any relief related to Internet 
``backbones,'' the large, interconnecting fiber-optic networks that 
constitute the core of the Internet. With respect to Local Private 
Lines, NYAG complains that the proposed remedies do not address the 
loss of competition from the potential elimination of AT&T's and MCI's 
resale of circuits owned by SBC and Verizon; \73\ argues that the 
proposed divestitures are inadequate because they involve only a 
``handful of buildings'' and, therefore, would not affect pricing 
throughout New York City or State, or constitute a viable network for a 
buyer; \74\ and suggests that the remedy is ``written in disappearing 
ink'' because the assets to be divested can be modified at the 
purchaser's option and with the consent of the United States.\75\
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    \72\ NYAG Comment at 4 (attached hereto as Attachment 3).
    \73\ Id. at 5.
    \74\ Id. at 6.
    \75\ Id. at 6-7.
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2. Response
a. DSL, Internet Backbone, and Local Private Line Resale
    Most of NYAG's comment \76\ relates to issues well beyond the scope 
of the Complaints. NYAG argues that the proposed Final Judgments should 
have required customer access to unbundled DSL services. It is not 
clear from the comment what merger-related harm NYAG intends this to 
remedy, but, in any event, there appears to be no relationship between 
that proposed restriction and the markets alleged in the United States' 
Complaints.\77\
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    \76\ NYAG also filed comments with the New York Public Service 
Commission (``NYPSC'') on April 29, 2005, as part of the Verizon/MCI 
merger proceedings before that body, raising essentially the same 
``naked DSL'' and Internet backbone concerns it raises here. The 
NYPSC approved the Verizon/MCI merger, with certain conditions, in a 
detailed 64-page order on November 22, 2005. Order Asserting 
Jurisdiction and Approving Merger Subject to Conditions, Joint 
Petition of Verizon Communications Inc. and MCI, Inc. For a 
Declaratory Ruling Disclaiming Jurisdiction Over or in the 
Alternative for Approval of Agreement and Plan of Merger, New York 
Public Service Comm'n CASE 05-C-0237, (Nov. 22, 2005) (``NYPSC 
Order''), available at http://www3.dps.state.ny.us/pscweb/
WebFileRoom.nsf/ArticlesByCategory/135BB9AA905F47A7852570C0005155BD/
$File/05c0237--11--22--05.pdf?OpenElement.
    \77\ DSL is primarily a ``mass market'' service, and the most 
frequently cited justification during the Department's and FCC's 
investigations for requiring the merged firms to offer ``naked'' or 
``unbundled'' DSL as a remedy is the allegation the mergers would 
reduce competition for mass market telephone service. If the merged 
firms were required to offer naked DSL, it would allegedly make it 
easier for standalone VoIP (``voice over internet protocol'') 
providers like Vonage to compete against the merged firm. The United 
States concluded that the evidence would not support a Section 7 
case alleging competitive harm in the ``mass market.'' That 
conclusion was consistent with those reached by the New York Public 
Service Commission as well as the FCC. See NYPSC Order at 29 (``We 
conclude that the merger will not likely result in anti-competitive 
effects for mass market customers.''); FCC Orders at ]] 81 (SBC/
AT&T), 82 (Verizon/MCI) (``As discussed below, we find that 
[Verizon/SBC]'s acquisition of [MCI/AT&T] is not likely to result in 
anticompetitive effects for mass market services.''). Although 
neither the FCC nor the NYPSC identified a problem in ``mass 
market,'' and therefore saw no need for a mandatory ``naked DSL'' 
remedy, they did accept the parties' voluntary commitments to 
provide ``naked DSL'' and included them as part of their orders. FCC 
Orders, Apps. F, G (respectively); NYPSC Order at 61-62, 63.
---------------------------------------------------------------------------

    Similarly, NYAG argues that the mergers could have anticompetitive 
effects in the Internet backbone market and argues that ``[t]he Court 
should reject the Verizon-MCI merger unless and until Verizon provides 
the information needed to make an informed decision regarding the 
extent to which backbone concentration will increase as a result of the 
proposed merger with MCI.'' It goes on to suggest that the Court should 
consider ``the appropriateness of divestiture of backbone assets'' 
based on that information.\78\ The United States investigated the 
effects of the mergers on the Internet backbone market, considering 
both the current traffic shares of the merging parties as well as 
potential increases in shares that might result from shifting SBC or 
Verizon retail customers onto the AT&T and MCI backbone. Ultimately, 
the United States concluded that competition in this market would not 
be harmed as the merged firms would continue to face several strong 
competitors. Therefore, it did not allege Internet backbone as a 
relevant product market, nor did it allege any harm in such a 
market.\79\ Accordingly, relief directed to the Internet backbone 
market is unnecessary and NYAG's concerns about Internet backbone do 
not implicate whether the proposed Final Judgments are in the public 
interest.
---------------------------------------------------------------------------

    \78\ NYAG Comment at 17. Essentially, NYAG asks the Court to 
conduct its own discovery and de novo antitrust investigation of the 
Internet backbone market, conduct a trial on whether the discovered 
facts prove liability, and then determine the appropriate remedy. 
This is, of course, not consistent with the Tunney Act.
    \79\ The FCC and the European Union also looked at the Internet 
backbone issue and determined that no relief was rquired. See, e.g., 
FCC Orders ]] 108 (SBC/AT&T), 109 (Verizon/MCI); Commission of the 
European Communities, Case No. COMP/M.3752-Verizon/MCI, Art. 6(1)(b) 
Non-Opposition Decision, ] 45 (Oct. 7, 2005), available at http://europa.eu.int/comm/competition/mergers/cases/decisions/m3752_20051007_20310_en.pdf.
---------------------------------------------------------------------------

    NYAG's comment also includes a paragraph complaining that the 
mergers will adversely affect competition because they will eliminate 
``discounted `last mile' wholesale leasing.'' Although this concern 
does, at least, involve Local Private Lines, it raises an issue 
unrelated to anything alleged in the United States' Complaints. The 
United States investigated whether the mergers would have a significant 
adverse impact on competition in Local Private Lines by eliminating 
AT&T and MCI as independent resellers of ILEC circuits, but determined 
that the evidence did

[[Page 17176]]

not support such a conclusion.\80\ Accordingly, it did not allege this 
as competitive harm in its Complaints, nor would it be appropriate to 
seek any relief regarding resold circuits.\81\
---------------------------------------------------------------------------

    \80\ The United States' investigation determined that A&T's and 
MCI's sales of resold circuits are relatively small and of limited 
competitive significance. Moreover, because numerous other CLECs 
have extensive fiber-optic networks in the metropolitan areas under 
consideration, as well as contracts with Verizon and SBC providing 
them with discounts similar to those of AT&T and MCI, other 
competitors could likely replace any competition that might be lost 
by the elimination of AT&T and MCI as independent resellers in SBC's 
and Verizon's territories respectively. The FCC reached a similar 
conclusion. FCC Order ]] 33, 43.
    \81\ The United States devoted significant time to investigating 
the issues discussed in NYAG's comments and concluded that the 
evidence did not support alleging competitive harm related to ``mass 
market,'' Internet backbone, or resold Local Private Lines. NYAG has 
the statutory ability to investigate violations of state and federal 
antitrust laws, see e.g., N.Y. Gen. Bus. Law Sec.  343 (McKinney 
2006) (providing for pre-complaint discovery), and the standing to 
enforce them. If NYAG believed the evidence justified a broad 
antitrust case based on resold Local Private Lines, Internet 
backbone, DSL, or anything else, it could have brought that case. 
Here, it elected not to do so.
---------------------------------------------------------------------------

City or State-wide Pricing
    NYAG briefly complains that the divestiture of only a ``handful of 
buildings'' is insufficient because it would not affect pricing 
throughout New York City or State. The United States did not allege, 
however, that the mergers would adversely affect prices throughout a 
whole city, state, or metropolitan area. As previously noted, there are 
multiple carriers with extensive networks in each metropolitan area 
under consideration,\82\ and the evidence did not demonstrate a 
likelihood of anticompetitive price effects covering all buildings in a 
metropolitan area. What the United States alleged was that the proposed 
mergers were likely to reduce competition to certain 2-to-1 buildings 
in each area, and the proposed remedy is directed at restoring 
competition to those buildings.\83\ NYAG notes that it is ``hard to see 
how this remedy could have any significant positive effect on 
competition beyond the footprint of the handful of individual buildings 
identified.'' \84\ But that is the point: The identified buildings are 
the only ones where competition was likely to be harmed, and they are, 
therefore, the only ones for which a remedy was required. The proposed 
remedy should not be viewed as inadequate, or inconsistent with the 
public interest, simply because it fails to affect competition in 
locations where the evidence did not demonstrate an anticompetitive 
effect.
---------------------------------------------------------------------------

    \82\ For instance, in the New York metropolitan area--the focus 
of NYAG's concerns--the United States' investigation identified more 
than a dozen carriers besides Verizon and MCI with significant fiber 
networks. At least a half dozen of these had hundred or thousands of 
route miles of fiber. The United States identified well in excess of 
4,000 CLEC ``last-mile'' building connections; less than 15 percent 
of these belonged to MCI. These conclusions are consistent with 
those reached by the New York Public Service Commission in its 
analysis of the New York metropolitan area. See NYPSC Order at 45 
(``We conclude that on average there are approximately six 
alternative fiber networks within 1/10 of a mile of the MCI-lit 
buildings in New York, and that 75% of those buildings have two or 
more alternative carriers.'')
    \83\ See supra note 56.
    \84\ NYAG Comment at 6.
---------------------------------------------------------------------------

(c) Scope of Divestiture
    NYAG also argues that the divested buildings, at least in New York, 
``do not, themselves, form the critical mass needed to build a network 
* * *. [A]ny would-be competitor who acquired the divested MCI 
facilities serving these scattered buildings would have neither the 
scope nor scale necessary to stand in MCI's competitive shoes.'' \85\ 
But the proposed Final Judgments did not contemplate that the purchaser 
would necessarily have no other assets beyond those being divested. As 
discussed in Section III.A.2.d, in every metropolitan area identified 
in the Complaints (including New York) there are at least several CLECs 
with extensive networks, including, e.g., switches, fiber, dozens or 
hundreds of ``on-net'' locations. Those CLECs are already effective 
competitors in many buildings in the metropolitan area, though not in 
the buildings covered by the proposed Final Judgments where they lack a 
last-mile connection. The proposed remedy, by providing a carrier with 
fiber-optic capacity to those buildings, will enable it to replace the 
competition that could potentially be lost as a result of the merger. 
The purpose of the United States having approval rights over the 
proposed buyer of the assets is to ensure that the assets are acquired 
by a firm that can effectively compete to provide services to the 
buildings in question.
---------------------------------------------------------------------------

    \85\ Id.
---------------------------------------------------------------------------

(d) ``Disappearing Ink''
    Finally, NYAG also raises one brief point regarding the assets to 
be divested: it suggests that the proposed remedy is ``written in 
disappearing ink'' because the assets to be divested can be modified at 
the purchaser's option and with the consent of the United States.\86\ 
The proposed divestitures in these matters involve a great many assets, 
including more than 700 lateral connections to specific street 
addresses. Moreover, because 18 metropolitan areas are involved, there 
will almost certainly be several different purchasers. It is possible 
that as the divestiture sales proceed, it will be discovered that 
exclusions in the divestiture assets are desirable. For instance, if it 
turns out that, unbeknownst to the United States at the time of filing, 
one of the buildings in question is scheduled for demolition, it hardly 
makes sense to require a divestiture of a lateral to that building. In 
order to maintain flexibility to deal with such contingencies, and to 
avoid burdening the Court with requests for a decree modification each 
time such an occasion might arise, the United States included in the 
proposed Final Judgments a mechanism for minor exclusions from the 
divestiture assets.\87\ To ensure that such exclusions are consistent 
with the purposes of the proposed Final Judgments, any exclusions must 
be at the purchaser's option, will require the consent of the United 
States, and are limited to assets and rights not necessary to meet the 
competitive aims of the Final Judgment.
---------------------------------------------------------------------------

    \86\ NYAG Comment at 7; see Proposed Final Judgments Sec.  II(D) 
(``With the approval of the United States, and in its sole 
discretion, and at the Acquirer's option, the Divestiture Assets may 
be modified to exclude assets and rights that are not necessary to 
meet the competitive aims of this Final Judgment.''). This provision 
is similar to ones used in other antitrust consent decrees that 
suggest that something less than the entire ``divestiture assets'' 
can be sold if the United States consents in writing. See e.g., 
United States v. Marquee Holdings, Inc., No. 05 CV 10722 Sec.  IV(I) 
(KMW) (S.D.N.Y. filed Dec. 22, 2005) (proposed final judgment), 
available at http://www.usdoj.gov/atr/cases/f213800/213862.htm.; 
United States v. United Health Group Incorporated, No. 1:05CV02436, 
Sec.  IV(I) (RMU) (D.D.C. filed Dec. 20, 2005) (proposed final 
judgment), available at http://www.usdoj.gov/atr/cases/f213800/213817.htm.
    \87\ The Tunney Act condemns ambiguity in proposed Final 
Judgments. 15 U.S.C. 16(e)(1)(A). It is for that reason that the 
proposed Final Judgments are extremely specific, identifying 
hundreds of individual building addresses. But that very specificity 
creates the need for some flexibility.
---------------------------------------------------------------------------

IV. Conclusion

    After careful consideration of these public comments, the United 
States remains of the view that the proposed Final Judgments provide an 
effective and appropriate remedy for the antitrust violation alleged in 
the Complaints and that their entry, therefore, would be in the public 
interest. Any settlement is a product of negotiation and compromise, 
and as courts have noted, the purpose of Tunney Act review is not for 
the court to engage in an ``unrestricted evaluation of what relief 
would best serve the public'' \88\ or to determine the relief ``that 
will best serve society,'' \89\ it is simply to determine whether the 
proposed decree is within the reaches of

[[Page 17177]]

the public interest--``even if it falls short of the remedy the court 
would impose on its own.'' \90\
---------------------------------------------------------------------------

    \88\ BNS, 858 F.2d at 462 (citing Bechtel Corp., 648 F.2d at 
666).
    \89\ Bechtel, 648 F.2d at 666.
    \90\ AT&T, 552 F. Supp. at 151.
---------------------------------------------------------------------------

    Under subsection (A) of 15 U.S.C. 16(e)(1), the Court is instructed 
to consider a number of factors relating to the competitive impact of 
the proposed Final Judgments.\91\ With respect to the ``termination of 
alleged violations,'' the Section 8 violation in each matter here is a 
merger that would reduce competition in Local Private Line and related 
services to certain buildings; by restoring competition to those 
buildings, the proposed remedy terminates the violations. With respect 
to ``provisions for enforcement and modification,'' the proposed Final 
Judgments contain the standard provisions that have been effective in 
numerous other cases brought by the United States. In particular, the 
proposed Final Judgments, provide that the Court retains jurisdiction 
over this action, and the parties may apply to the Court for any order 
necessary or appropriate for the modification, interpretation, or 
enforcement of the Final Judgment. With respect to ``duration of relief 
sought,'' the proposed divestitures are for a minimum of ten years. As 
discussed above, this period is adequate and appropriate given the 
rapidly changing nature of technology and the industry, as well as the 
useful life of the divestiture assets. With respect to ``anticipated 
effects of alternative remedies actually considered'' the alternative 
of injunctions blocking the proposed mergers would likely have 
prevented the firms in question from realizing literally billions of 
dollars in efficiencies. Such an extreme remedy is unwarranted given 
the relatively small magnitude of the competitive problem and the 
availability of a divestiture remedy that will completely resolve it. 
With respect to ``whether its terms are ambiguous,'' no term in either 
proposed Final Judgment is ambiguous. Among other things, the assets to 
be divested are specified down tot he individual building addresses. 
Finally, with respect to ``any other competitive considerations bearing 
upon the adequacy of such judgment,'' none casts doubt upon the 
adequacy of the proposed Final Judgments.
---------------------------------------------------------------------------

    \91\ The Court shall consider ``the competitive impact of such 
judgment, including termination of alleged violations, provisions 
for enforcement and modification, duration of relief sought, 
anticipated effects of alternative remedies actually considered, 
whether its terms are ambiguous, and any other competitive 
considerations bearing upon the adequacy of such judgment that the 
court deems necessary to a determination of whether the consent 
judgment is in the public interest.'' 15 U.S.C. 16(e)(1)(A).
---------------------------------------------------------------------------

    Under subsection (B), the Court is to consider ``the impact of 
entry of such judgment upon competition in the relevant market or 
markets, upon the public generally and individuals alleging specific 
injury from the violations set forth in the complaint including 
consideration of the public benefit, if any, to be derived from a 
determination of the issues at trial.'' \92\ Because the buildings 
identified in the proposed Final Judgments are the only ones in which 
competition is likely to be lessened as a result of the mergers, the 
impact of entry of the proposed Final Judgments will be to restore any 
competition lost as a result of the merger in Local Private Lines and 
related services. Customers for Local Private Line and related services 
provided to the buildings in question--parties who might have otherwise 
suffered injury from the violations set forth in the Complaints--are 
likely to have competitive choice restored to them via the contemplated 
divestitures. Moreover, the relief is sufficiently limited so that the 
public will not suffer any adverse consequences from the proposed Final 
Judgments.\93\ No conceivable benefit could arise from a determination 
of these issues at trial. Based on the factors set forth in the Tunney 
Act, the proposed Final Judgments are in the public interest.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 16(e)(1)(B).
    \93\ Conversely, an injunction against the mergers, or a 
divestiture of customers as proposed by COMPTEL would likely have 
adverse impact on the public.
---------------------------------------------------------------------------

    Pursuant to Section 16(d) of the Tunney Act, the United States is 
submitting the public comments and its Response to the Federal Register 
for publication. Our response is also being provided to each of the 
commenters. After the comments and the United States' Response to 
Comments are published in the Federal Register, the United States will 
move this Court to enter the proposed Final Judgments.

     Respectfully submitted,
Laury E. Bobbish,

Assistant Chief.

Lawrence M. Frankel,

(D.C. Bar No. 441532), Trial Attorney.

U.S. Department of Justice, Antitrust Division, Telecommunications 
and Media Enforcement Section, 1401 H Street, NW., Suite 8000, 
Washington, DC 20530, Telephone: (202) 514-5621, Facsimile: (202) 
514-6381.

Plaintiff United States' Response to Comments

Filed in United States v. SBC Communications, Inc. and AT&T Corp., Civ. 
Action No. 1:05CV02102 (EGS) and United States v. Verizon 
Communications and MCI, Inc., Civ. Action No. 1:05CV02103 (EGS)

Attachment 1--Comments Regarding the Proposed Consent Decrees Submitted 
on Behalf of the Alliance for Competition in Telecommunications (ACTel)

Comments Regarding the Proposed Consent Decrees in United States v. SBC 
Communications, Inc. and AT&T Corp. (Civil Case No. 05-2102) and United 
States v. Verizon Communications, Inc. and MCI, Inc. (Civil Case No. 
05-2103)

Submitted on Behalf of the Alliance for Competition in 
Telecommunications (ACTel)

Thomas Cohen,

Executive Director, Alliance for Competition in Telecommunications.

Gary L. Reback,

Carr & Ferrell LLP.

    On December 15, 2005, the Department of Justice published in the 
Federal Register the Proposed Final Judgments resolving virtually 
identical Complaints filed by the United States to enjoin the 
acquisition of AT&T Corp. by SBC Communications Inc., and the 
acquisition of MCI, Inc. by Verizon Communications, Inc. The respective 
Complaints characterize the former acquisition as creating ``the 
nation's largest provider of telecommunications services,'' and the 
latter transaction as creating ``one of the nation's largest providers 
of telecommunications services.'' Complaints at ]1. Among all of the 
overlaps and increases of concentration in telecommunications products, 
services and assets that the transactions procedure, and 
notwithstanding the complaints and protests of consumer and business 
customers at both the state and Federal level, the Department of 
Justice's challenge to the proposed transaction is limited to the 
effect of a single duplicative product offering.
    Specifically, the Complaints seek to enjoin both transactions, 
because they ``will substantially lessen competition'' in the provision 
and sale of ``Local Private Lines'' (also known as ``special access'') 
to the wholesale market as well as voice and data services that rely on 
Local Private Lines, with the likely result that prices for the Lines 
and services using those Lines will increase

[[Page 17178]]

``to levels above that which would prevail absent the merger(s).'' 
Complaints ]]1, 25, 33. The Complaints indicate that, absent relief, 
competition will be diminished and prices will rise for both wholesale 
and retail ``Local Private Line'' customers. Complaints ]25.
    These comments are directed to both cases and are timely submitted 
pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)-(e) (known as the ``Tunney Act''), on behalf of the Alliance for 
Competition in Telecommunications (``ACTel''). ACTel members include 
both competitive local exchange carriers (``CLECs'') and interexchange 
carriers (``IXCs'') that buy Local Private Lines \1\ at wholesale from 
the merging companies. ACTel members combine these purchased lines with 
additional facilities, technology, products and services to sell their 
own value-added telecommunications services, sometimes in competition 
with the merging companies, to end user business customers. Many of 
these value-added telecommunications services are directed to small- 
and medium-sized business customers. These facts are described in the 
Complaints at ]]14, 23.
---------------------------------------------------------------------------

    \1\ Actually the Lines are based, but because the Complaint uses 
terminology of sale, these comments do, as well.
---------------------------------------------------------------------------

    ACTel members and their customers are therefore among those that 
the Complaints identify as suffering competitive injury from the 
transactions, and on whose behalf the Government seeks relief. ACTel 
agrees that the harm alleged in the Complaints is accurate, 
demonstrable, and unless adequately remedied, ruinous. Indeed, ACTel 
members, in compliance with Department of Justice compulsory process, 
produced documents and information revealing that the proposed 
transactions can be expected to increase the cost of Local Private 
Lines from 20% to 500% depending on the metropolitan area and type of 
circuit being purchased--if the merged parties even continue to sell 
Local Private Lines to ACTel members at all after the acquisitions.
    But while the Complaints correctly identify the competitive harm 
produced by the transaction, the remedy in the Proposed Final Judgments 
fails even the most deferential standard for Tunney Acts review. The 
remedy does not prevent the elimination of competition of Local Private 
Lines (the injury charged in the Complaints) because, among other 
things, the remedy set forth in the Proposed Judgments, unlike the 
injury charged in the Complaints, addresses only the part of the 
Private Line that connects to a building, not the part of the Private 
Line that connects to a carrier's network. Hence, reviewing the remedy 
``in relationship to the violations that the United States has alleged 
in its Complaints(s),'' \2\ and deferring to the Government to whatever 
extent is required by law, the remedy does not, and cannot logically, 
ameliorate the harm alleged in the Complaints.
---------------------------------------------------------------------------

    \2\ This is the standard the Government claims is appropriate 
for Tunney Act review. See FR at 74350. However, given that Congress 
amended the Tunney Act to overrule District of Columbia Circuit 
Court of Appeals and District Court precedent that was overly 
deferential to Antitrust Division consent decrees, it would make a 
mockery of the legislation to impose the very narrow standard of 
review advocated by the Government. The amendments to the Tunney Act 
compel the reviewing court to consider, inter alia, the ``impact'' 
of the entry of judgment on ``competition in the relevant market'' 
See Pub. L. 108-327, 221(b)(2) rewriting 15 U.S.C. 16(e).
    No suggestion is made in the statute or legislative history that 
the courts should defer to either the Government's identification of 
injury or the Government's proposed remedy to that injury. On the 
contrary, as explained in the text following footnote 2 above, the 
reviewing court is to conduct an ``independent, objective, and 
active determination without deference to the DOJ.''
---------------------------------------------------------------------------

    The judicial review of the Government's settlements in these cases 
will constitute the first significant application of the Tunney Act 
since Congress amended that statute in 2004. The Congressional 
amendments specifically overruled District of Columbia Circuit Court of 
Appeals and District Court precedent that was deemed overly deferential 
to Antitrust Division consent decrees.\3\ In response to those 
decisions, Congress reemphasized its intention that courts reviewing 
consent decrees ``make an independent, objective, and active 
determination without deference to the DOJ.'' \4\ Courts are to provide 
an ``independent safeguard'' against ``inadequate settlements.'' \5\ 
Specifically, the Act was amended to compel reviewing courts to 
consider both ``ambiguity'' in the terms of the proposed remedy, as 
well as the ``impact'' of the proposed settlements on ``competitors in 
the relevant market or markets.'' \6\
---------------------------------------------------------------------------

    \3\ See 150 Cong. Rec., S 3617 (April 2, 2004) (Statement of 
Sen. Kohl).
    \4\ Id.
    \5\ Id.
    \6\ See id at S 3618; Pub. L. 108-327, Sec.  221(b)(2) amending 
15 U.S.C. 16(e).
---------------------------------------------------------------------------

    This is not a case in which there is some debate about the efficacy 
of the proposed remedy. Rather, this is the case in which the court 
documents filed by the Government, as well as uncontroverted parts of 
the Government's evidence, compel the conclusion that the remedy cannot 
succeed. The proposed remedy fails to satisfy the Tunney Act even when 
judged under the overly deferential standard proposed by the 
Government. When evaluated under the standard required by Congress in 
the 2004 amendments to the Tunney Act, the proposed remedy is barely 
worth of serious consideration.

Prior to the Acquisitions, The Wholesale Market Functioned Effectively, 
Producing Low Prices

    Any evaluation of the Government's efforts in these cases to 
protect the wholesale Private Line market from anticompetitive injury 
must begin with an understanding of the magnitude of the wholesale 
market and its importance. While the Complaint \7\ formally denominates 
the relevant product market as ``Local Private Lines,'' the Complaint 
goes on to explain that SBC and Verizon refer to these products as 
``special access'' circuits.
---------------------------------------------------------------------------

    \7\ The two Complaints use identical paragraph numbering and 
virtual identical language. For ease of presentation, the singular 
is generally used instead of the plural throughout the rest of these 
comments, and SBC and AT&T are generally used as examples (as 
opposed to Verizon or MCI) but the comments are directed to both 
cases unless otherwise indicated.
---------------------------------------------------------------------------

    As the Complaint points out, most office buildings are connected, 
or ``lit,'' only by either SBC or Verizon in their respective 
territories. In pricing ``special access'' circuits, then, SBC and 
Verizon can frequently charge whatever the market will bear, unless the 
price for a particular circuit is constrained by FCC regulations. 
Consequently, SBC and Verizon special access revenues, as well as 
annual rates of return on special access, have grown dramatically over 
the past decade. Verizon's annual rate of return on special access was 
2.14% in 1996, but over 23% in 2003. SBC's annual rate of return on 
special access was 63.14% in 2003. Overall, according to official 
comments filed by MCI at the FCC, special access revenues were 
approximately $3.14B in 1996, but had grown to $13.4B in 2003.
    Over the years, in response to the high special access prices that 
SBC and Verizon charged, a robust and competitive wholesale market for 
Local Private Lines has emerged. In this wholesale market, carriers 
like the ACTel members lease Local Private Lines from other carriers, 
in order to reach business customers. AT&T and MCI have the largest 
networks, aside from ``Baby Bells'' like Verizon and SBC, see Complaint 
] 17, and AT&T and MCI have become mainstays of the

[[Page 17179]]

wholesale market. In fact, it is doubtful there would be a wholesale 
market, certainly a market of the current size and scope, without these 
two companies.
    The AT&T and MCI networks were not created overnight; they were 
built up over decades. Because neither AT&T nor MCI started from a 
position of local monopoly, as Verizon and SBC did, the business 
incentives and perceived opportunities of AT&T and MCI, on one hand, 
and SBC and Verizon on the other, were always quite different. In 
particular, both AT&T and MCI seized upon the opportunity to capture 
additional revenue by leasing capacity in their local networks to other 
competitive carriers. In addition, AT&T and MCI negotiated significant 
discounts from SCB and Verizon for the circuits they leased. These 
discounted, leased circuits, coupled with the large networks built or 
acquired by AT&T and MCI, permitted those companies to make very broad, 
low-priced offerings to the wholesale market. As a result, the 
wholesale market for Local Private Lines grew to an enormous size. In 
widely published reports that were submitted to the Department of 
Justice, two respected analysts estimated the Local Private Line market 
as roughly $14B.
    Companies that procure Local Private Lines in the wholesale market 
keep records of competitive bids submitted to them for the purchase of 
these Lines from other companies, specifically including AT&T and MCI. 
Many such bidding records, kept in the ordinary course of business to 
select the lowest wholesale price offered for circuits to be procured, 
were turned over to the Government in response to compulsory process as 
part of the Government's investigation of these acquisitions.
    These data sets show that AT&T and MCI are the low-price leaders in 
the wholesale market for Local Private Lines. They are not only the 
most pervasive suppliers, but they are the most aggressive and cheapest 
suppliers, as well. Standard statistical analysis of this bid data 
demonstrates that AT&T's bids result in lower prices for Local Private 
Lines in SBC territory, and MCI's bids result in lower prices for Local 
Private Lines in Verizon territory, regardless of the number of other 
bidders offering the same circuit. In fact, the data gathered by the 
Government's investigation showed that even SBC itself has responded to 
competition from AT&T by lowering its own Local Private Line wholesale 
prices.
    Finally, the data sets gathered by the Department of Justice also 
demonstrate that the larger the number of competing offers (up to a 
reasonable level), the lower the price charged for a particular circuit 
to the acquiring purchaser. In other words, these are not markets in 
which two competitors are as good for competition as a larger number of 
competitors would be. To the contrary, three competitors offering to 
sell a particular circuit produces lower prices that just two 
competitors, and four competitors produces lower prices than three 
competitors.
    In sum, there is good reason for the Department of Justice to file 
lawsuits to try and prevent competitive injury to the wholesale market 
for Local Private Lines. That market, prior to the acquisitions, was 
vast, robust and competitive. It operated efficiently, producing 
significantly lower prices than the prices that SBC or Verizon charged, 
and it allocated resources according to competitive bidding. The 
wholesale market has been producing differentiated telecommunications 
services at low, free-market prices to all types of business customers, 
particularly medium-sized enterprises. Unless conditioned in a 
meaningful way, the proposed acquisitions will devastate this market. 
But by its own terms, the Government's proposed remedy does not meet 
the competitive danger.

The Proposed Judgment Is Inconsistent With the Complaint in the 
Treatment of ``Transport''

    The Complaint identifies the relevant product market as ``Local 
Private Lines,'' and telecommunications services that rely on those 
lines. Complaint ] 19. As the Complaint explains, a Local Private Line 
is not a fixed, freestanding physical product, but rather is more akin 
to a marketing concept--a recognized service category among carriers 
and customers. Complaint ] 21. It is basically a portion of a carrier's 
network (a circuit or group of circuits) that is specified 
(``dedicated'') and sold to ACTel members and other carriers to connect 
their networks to discernible points outside of those networks. As the 
Complaint states, a Local Private Line originates and terminates within 
a single metropolitan area. Complaint ] 13.
    According to the Complaint, a ``typical'' Local Private Line has 
two components--``local loop'' (also called ``laterals'') and 
``transport.'' Complaint at ] 13. See also Proposed Final Judgment 
Sec.  II, D; Competitive Impact Statement, FR 74348. A ``loop'' 
connects a building to a carrier's network. But that connection might 
not occur at the right point on the network to facilitate the 
transmission of voice and data from the building to its desired 
termination point--a faraway building, for example. As the Proposed 
Final Judgment explains, the loop only goes from a building to the 
first splice point on a carrier's network used to serve different 
buildings. Proposed Final Judgment Sec.  II F. So a ``transport'' 
circuit is added into the Private Line to extend it, from the end of 
the loop to the right place on the carrier's network (perhaps a 
switching facility farther away), or from one carrier's network to 
another carrier's network. See Figure 1.

[[Page 17180]]

[GRAPHIC] [TIFF OMITTED] TN05AP06.000

    There may be multiple carrier suppliers of a particular ``loop'' 
and the same or different multiple carrier suppliers of transport 
circuits that connect to the loop. Increasingly, as documents submitted 
to the Government indicate, CLECs and IXCs buy transport and loop 
circuits separately from different suppliers, and combine the segments 
into Local Private Lines for resale to end user business customers.
    The Government documents sometimes focus on Local Private Lines and 
sometimes focus only on the loop portions of those Lines. For example, 
the ``Relevant Product Markets'' in the Complaint are defined as Local 
Private Lines, Complaint at ] 19, and the ``Anticompetitive Effects'' 
section of the Complaint is directed to the effect of the merger on 
``Local Private Line'' service, Complaint at ] 25. Similarly, the 
explanation of the relief in the Competitive Impact Statement speaks of 
a remedy that will ``eliminate the anticompetitive effects of the 
acquisition of Local Private Lines.'' See FR 74348. The 2004 Tunney Act 
amendments require the reviewing court to consider the impact of the 
proposed settlement on competition in this particular market identified 
by the Government. See 15 U.S.C. 16(e); S 3618.
    But the Proposed Final Judgment does not speak of ``Local Private 
Lines'' at all. Rather, the Judgment requires the divestiture only of 
certain ``loop'' circuits, identified by the addresses of the buildings 
at which the loops originate. See Proposed Final Judgment Sec.  II D. 
The Competitive Impact Statement explains that these are buildings 
serviced pre-merger by both AT&T and SBC loops (or MCI and Verizon 
loops, as the case may be). However, not all buildings serviced by 
merging parties are covered by the terms of the Proposed Judgment. 
Divestiture of a loop circuit to a particular building is required only 
if AT&T and SBC (or Verizon and MCI) were the only carriers connected 
by their own loops to the building prior to the acquisition. Only in 
these ``2 going to 1'' loop scenarios is a divestiture required. See FR 
at 74348. See Figure 2.
    The Final Judgment also provides for the divestiture of certain 
``transport'' circuits--but only those attendant to the divested loops. 
See Proposed Judgment Sec.  II D. The Competitive Impact Statement 
explains that the only transport circuits to be divested are those that 
enable the divested loops to be connected to the network of the 
specific carrier purchasing those loops. FR 74348. No provision is made 
for the transmission of voice and data information from the purchasing 
carrier's network to another building in the same metropolitan area not 
directly connected to that carrier's network.
    Merely from a review of the Government's documents, it is apparent 
that three deficiencies in the Government's approach prevent the 
proposed remedy from being effective.

[[Page 17181]]

[GRAPHIC] [TIFF OMITTED] TN05AP06.001

The Proposed Final Judgment Does Not Even Appear To Cover All ``2 to 
1'' Loop Buildings

    First, there is some ambiguity, if not outright error, in the 
discrepancy between the number of buildings the Proposed Final Judgment 
identifies and what publicly available data suggests in terms of the 
number of ``2 to 1'' loop buildings affected by the mergers. Ambiguity 
in the proposed remedy is one of the issues the District Court is 
required to consider by the express terms of the 2004 Tunney Act 
amendments.
    The building lists attached to the Proposed Judgment lists only 383 
buildings in SBC territory and 356 buildings in Verizon territory to 
which the remedy will apply. This is inconsistent with data relied upon 
by both SBC and Verizon in Federal Communications Commission 
proceedings. GeoResults, Inc., a private corporation, publishes data 
listing the presence and type of network terminating equipment carriers 
have placed in buildings. Verizon has stated, in FCC proceedings, that 
the data used by GeoResults is ``recognized as an industry standard by 
numerous national and international telecommunications standard-setting 
bodies'' and can be reliably used to ``identify and locate buildings * 
* * that are served by [competitive providers'] fiber-enabled network 
equipment.'' \8\ SBC similarly stated to the FCC that ``GeoResults is a 
reasonably reliable source, and if anything its data understate the 
deployment of competitive fiber.'' \9\
---------------------------------------------------------------------------

    \8\ Verizon comments, Declaration of Verses, LaTaille, Jordan 
and Reny, July 15, 2004, FCC Docket 01-338, ]] 22-24.
    \9\ Joint Declaration of Scott Alexander and Rebecca Sparks of 
SBC, ]] 22-23, attached to Letter of Christopher Hermann of SBC to 
Ms. Marlene Dortch of FCC, Nov. 16, 2004, FCC Docket 01-338.
---------------------------------------------------------------------------

    GeoResults data includes buildings in which CLECs buy loops from 
SBC and Verizon, as well as buildings to which CLECs physically connect 
with their own fiber. GeoResults may therefore significantly 
overestimate the number of ``2 to 1'' loop situations the Government's 
remedy purports to address. But the difference between what the 
GeoResults data predicts and the number of buildings the Government's 
remedy purports to address is so vast as to defy such an easy 
explanation. This is true for both SBC and Verizon territory. For 
example, as to SBC territory, GeoResults data indicates that in 
Cleveland there are approximately 1630 ``2 going to 1'' buildings, but 
the Government's list in the Proposed Final Judgment includes none. In 
Milwaukee, the GeoResults data predicts 1124 such buildings, but the 
Proposed Final Judgment lists but 38. In Los Angeles, GeoResults 
predicts 6318 buildings requiring the Government's remedy, but the 
Government lists only 36.
    The same discrepancy appears for the cities in Verizon territory. 
GeoResults data indicates there are more than 100 ``2 to 1'' buildings 
in Pittsburgh, but the Government has none listed. According to 
GeoResults, Philadelphia should have almost 300 such buildings, but the 
Government lists only 12. So, making whatever allowance is appropriate 
for the inclusion of leased loops in the GeoResults data, the 
Government's lists seem to include far two few buildings.
    The Government does not explain or document, for the benefit of 
both the Court and the public, how it arrived at its lists of ``2 to 
1'' situations. Presumably the Government started with building lists 
tendered by the merging parties, and either audited or made adjustments 
to these lists. While the GeoResults inclusion of leased loops might 
account for some of the discrepancy between the GeoResults data and the 
Government lists, it certainly appears likely, from the filings AT&T 
made in the FCC to secure clearance for its acquisition, that the 
Government's remedy does not include all buildings that the Complaint

[[Page 17182]]

purports to cover. There is another more plausible explanation for this 
discrepancy.
    At the FCC, AT&T's economic expert filed a declaration in aid of 
the merging companies' claim that the proposed merger would not produce 
the anticompetitive effects feared by the Government. The declaration 
sets forth the total number of ``2 to 1'' buildings in SBC territory 
based on AT&T internal records.\10\ That precise number is redacted 
from the FCC public record, but the other verbiage from the 
declaration, including the expert's methodology, remain in the public 
record. In the declaration, the expert starts with the total number of 
``2 to 1'' buildings and then makes subtractions from that total. For 
example, in aid of his argument that all ``2 to 1'' situations will not 
produce price increases, the expert subtracts ``2 to 1'' situations in 
which he argues that other CLECs might build their own loops, even if 
AT&T's loops are acquired by SBC. Similarly, he subtracts situations in 
which he claims that, although AT&T is eliminated as SBC's only 
competitor, the FCC regulates the price SBC can charge for the loop in 
question, so competitive injury is minimized. See Carlton Dec. at ]] 
15-48.
---------------------------------------------------------------------------

    \10\ Reply Declaration of Dennis W. Carlton and Hal S. Sider, 
May 9, 2005, as an attachment to the Joint Opposition of SBC 
Communications Inc. and AT&T Corp. To Petitions To Deny and Reply 
Comments, filed In the Matter of Applications for Consent to 
Transfer of Control of Licenses and Section 214 Authorizations from 
AT&T Corp., Transferor, to SBC Communications Inc., Transferee, WC 
Docket No. 05-65, Federal Communications Commission, May 9, 2005, at 
]] 15-48 (hereinafter sometimes ``Carlton Dec.'').
---------------------------------------------------------------------------

    Given the large discrepancy between publicly available data and the 
number of buildings on the Government's lists, it would appear that the 
Government made such subtractions from the total number of ``2 to 1'' 
buildings to come up with the lists attached to the Proposed Final 
Judgment. It appears, for example, that the Government subtracted the 
situations in which AT&T's expert argued that the CLECs would build 
their own loops.
    But such subtractions are impermissible by the express terms of the 
Complaint. The Complaint plainly states, for example, that competitive 
injury will occur whenever AT&T is the only ``facilities-based,'' 
(i.e., owning its own line) competitive alternative to SBC for Local 
Private Line connections to buildings. Complaint at ]]25, 26. The 
Competitive Impact Statement similarly states that ``buildings where 
AT&T is the only CLEC with a last-mile-connection''--without limitation 
or subtractions--are the places where injury to competition occurs. FR 
At 74348. And the Complaint expressly rejects the notion that other 
CLECs might build their own lateral connections to these buildings. 
Complaint at ]]27-29. After reviewing the costs associated with 
building a lateral, the Complaint concludes that ``entry is unlikely to 
eliminate the competitive harm that would likely result from the 
proposed merger.'' Complaint at ]29.
    The Government needs to explain its methodology to permit 
meaningful judicial review. The Government papers are filled with 
precisely the ambiguity that the amended Tunney Act does not permit. If 
the Proposed Final Judgment does not address all situations in which 
AT&T is eliminated as the only facilities-based competitive alternative 
to SBC for loops, the court must withhold its approval of the 
settlements.

The Proposed Judgment Fails to Remedy the Injury Because the Judgment 
Addresses Only the Building End of Loops

    Even when the building lists are made complete to conform to the 
Government's allegations, the remedy in the Proposed Final Judgment--
providing a divestiture for all ``2 going to 1'' loop situations--fails 
to correct the competitive injury alleged in the Complaint (elimination 
of competition for ``Private Line'' service), and therefore fails the 
most deferential Tunney Act review. This failure results from the fact 
that the remedy, unlike the injury charged in the Complaint, addresses 
only the part of the Local Private Line that connects to a building, 
not the part of the Private Line that connects to a carrier's network.
    The Complaint explains that a ``typical'' Local Private Line has 
two components--a ``loop'' (or ``lateral'') and a ``transport'' 
circuit. Complaint at ]13. As explained above, the ``loop'' connects 
the building to a carrier's network and the ``transport'' circuit 
extends the loop from the initial splice point on the carrier's network 
to other points on the carrier's network or to other carriers' 
networks.
    The Complaints alleges that where AT&T is eliminated as the only 
facilities-based competitor to SBC for Local Private Lines, the merged 
company will be able to raise prices to customers of Local Private 
Lines (including ACTel members), thereby creating an antitrust 
violation. Complaint ]]25, 32-33. But the Proposed Final Judgment 
orders the divestiture of only certain loops (``laterals'') with 
attendant transport. Final Judgment Sec.  IID. The Competitive Impact 
Statement tries to explain this inconsistency by suggesting that it is 
decrease in competition for loops (2 going to 1) that creates the 
injury in the Local Private Line market. FR 74348.
    The approach used in the Proposed Final Judgment requires the 
divestiture only of these loop segments (with attendant transport) that 
result in a ``2 to 1'' loop situation when viewed from the origin of 
the loop, that is, from the building. Even assuming the rather dubious 
assertion that it is the decrease in competition for loops that creates 
the injury in the Local Private Line market, the remedial approach used 
in the Final Judgment (looking to the origin point of the loop by 
building address), will not prevent the harm alleged in the Complaint 
(a price increase to customers of Local Private Lines).
    This is because the ``remedy'' will only maintain competitive 
alternatives for transmissions from a building to a carrier's network. 
But no one simply calls a carrier's network; the intended destination 
of a call is always another building, frequently connected to the 
carrier's network by another Local Private Line that may not be covered 
by the terms of the Proposed Final Judgment. Because the Proposed Final 
Judgment identifies the affected ``2 to 1'' Local Private Lines only 
from the point of the loop original at the building, it does not 
prevent the acquisition from restraining competition by producing ``2 
to 1'' situations in the Local Private Lines that take the call from 
the carrier's network to the destination building.
    This is best illustrated by the example of a corporation with main 
offices in a downtown high-rise and branch offices in suburban office 
parks in the same metropolitan area. The corporation is a customer of a 
CLEC. The customer's headquarters downtown needs to send high-volume 
voice and data transmissions to its branch offices in the suburbs. 
Before the merger, the CLEC bought a Private Line from AT&T to service 
the customer and connect the originating building to the CLEC's 
network. If AT&T were the only facilities-based carrier serving the 
building in competition with SBC before the merger, the Final Judgment 
remedy, in theory, would prevent the merged company from extracting a 
higher price for the Private Line because the CLEC would be able to buy 
the divested loop itself, or lease it from the carrier that buys it as 
a ``divestiture asset'' under the Proposed Final Judgment.
    The Proposed Final Judgment also requires the divestiture of 
transport circuits sufficient to connect that loop's splice point on 
the AT&T network to the purchasing CLEC's network. FR 74348.

[[Page 17183]]

So, prior to the acquisition, the CLEC had two Private Line choices 
from the downtown main office to its network, and the CLEC continued to 
have two choices after the acquisitions. The remedy can therefore be 
presumed successful at getting the call onto the CLEC's network without 
a price increase created by a ``2 to 1'' loop situation resulting from 
the acquisition. See Figure 3.
    But when the voice and data transmissions leave the CLEC's network 
and go to the suburban office park location, the Final Judgment 
``remedy'' often will be of no help. The transmissions would have to go 
from the CLEC's network over a ``transport'' circuit to a splice point 
for the lateral connecting to the suburban office building. Before the 
acquisition, if AT&T and SBC provided the only facilities-based 
competition for the transport circuit, then after the acquisition the 
merged company, as the only supplier of the transport circuit, is in a 
position to raise the price for that circuit to higher than competitive 
levels under the theory of the Government's Complaint. See Complaint at 
]25. The remedy does not address the ``2 to 1'' transport situation.
[GRAPHIC] [TIFF OMITTED] TN05AP06.002

    This problem cannot be argued away by suggesting that there is a 
great deal of duplicative transport circuitry in each metropolitan 
area. This kind of areawide analysis would also show a plethora of 
duplicative loops in each metropolitan area. But the Government has 
decided that this type of areawide analysis is inappropriate. Instead, 
the Complaint elects to analyze each Local Private Line individually in 
order to assess the effect of the mergers on competition. The 
Government conducts this analysis for the loop components of the Local 
Private Lines on a segment-by-segment basis and must therefore do the 
same for transport. A change in methodology for transport would 
undermine the integrity of the Government's loop analysis.
    It is impossible to say, from the public record, precisely how 
often a ``2 to 1'' reduction in transport circuit providers occurs. But 
this much is known. SBC itself has acknowledged that there are numerous 
situations in which AT&T is likely positioned as the only facilities-
based competitor for a group of transport circuits around on SBC wire 
center.\11\ The actual bid data submitted by ACTel members to the 
Department of Justice is even more compelling. These data sets reflect 
carriers that actually have transport circuits to sell to the wholesale 
market (some carriers may have transport circuits filled entirely by 
their own traffic). The data contains numerous examples in which SBC 
and AT&T (or MCI and Verizon) were the only competitors on a particular 
transport circuit. Indeed, the data shows that AT&T and MCI are far and 
away the leading CLEC suppliers of transport circuits to the wholesale 
market.
---------------------------------------------------------------------------

    \11\ SBC has admitted in the public record that there are scores 
of wire centers in which AT&T is SBC's only competitor. See letter 
from Gary L. Phillips of SBC to Ms. Marlene Dortch of the FCC filed 
as an ex parte communication on August 12, 2005, In the Matter of 
Applications for Consent to Transfer of Control of Licenses and 
Section 214 Authorizations from AT&T Corp., Transferor, to SBC 
Communications Inc., Transferee, WC Docket No. 05-65, Federal 
Communications Commission. But even this may understate the number 
of transport circuits for which AT&T and SBC are the only 
competitors because AT&T's expert has also admitted in the public 
record that the presence of smaller competitors at other SBC wire 
centers does not necessarily indicate ownership of transport 
circuits in competition with SBC. See Carlton Dec. ]54.
---------------------------------------------------------------------------

    In short, then, although the transport circuit from the carrier's 
network to the splice point for the loop goes from two facilities-based 
competitors to one, the ``remedy'' will not provide relief unless the 
loop circuit from the end of the transport segment to the destination 
building also goes from ``2 to 1.'' Frequently, however, the merger 
will not result in a true ``2 going to 1'' situation for the loop 
segment connecting the splice point to the building. Sometimes, for 
example, there might be only one supplier of the loop to begin with, 
SBC, but price regulation by the FCC prevents SBC from raising the rate 
on the loop to higher than competitive levels. However, the connecting 
transport circuit is likely not under a similar FCC constraint. The 
merged company could therefore raise the price of the Local Private 
Line from

[[Page 17184]]

the carrier's network to the destination building by using its ``choke 
hold'' over the transport segment of that Line.
    Nor is this problem confined to a situation in which there is only 
one supplier of the loop going from the transport segment to the 
building. If there are three suppliers of the outbound loop, for 
example, the divestiture remedy would not apply at all. Nor would the 
divestiture remedy apply if the two suppliers of the loop were carriers 
other than both AT&T and SBC. (See Figure 3) In each such case, the 
remedy does not apply, but the merged company can create precisely the 
anticompetitive injury identified by the Complaint because of its 
``choke hold'' over the transport circuit from the carrier's network to 
the splice point.\12\
---------------------------------------------------------------------------

    \12\ The data sets submitted by ACTel members to the Government 
contain numerous examples of all three situations described in the 
text: (a) SBC as the only supplier of a loop circuit under UNE 
pricing; (b) three suppliers of a loop circuit; (c) two suppliers of 
a loop circuit, but not both SBC and AT&T.
---------------------------------------------------------------------------

    The Government's solution fails to remedy the injury identified in 
the Complaint because the solution applies, by its own terms, only to 
loops connecting buildings to networks, but not to transport connecting 
networks to each other. Even assuming the relief proposed in the 
Proposed Final Judgment is effective for transmissions to a carrier's 
network, transmissions from that network to terminating buildings will 
still be subject to the ``2 to 1'' choke hold because the Government's 
remedy does not include transport (unless it is attendant to a divested 
loop for a building).

The Proposed Judgment Does Not Produce the Promised Remedy Because the 
Judgment Does Not Eliminate the Anticompetitive Effects of the 
Acquisitions

    The Government's remedy only addresses certain ``2 to 1'' loop 
situations. The most serious problem with the proposed ``remedy'' is 
that the remedy simply cannot logically or factually ``eliminate the 
anticompetitive effects of the acquisition of Local Private Lines,'' 
the claim made in the Competitive Impact Statement. See FR at 74348. 
The Complaint also focuses on Local Private Lines, defining the 
relevant product market as ``Local Private Lines,'' not loop segments 
going from two choices to one. Under the 2004 amendments, Tunney Act 
review must therefore consider the impact of the remedy on that very 
market. The Government's remedy might at best ``eliminate'' certain ``2 
to 1'' loop situations, but the remedy does not ``eliminate the 
anticompetitive effects of the acquisition of Local Private Lines'' 
because there are many ``anticompetitive effects'' in Private Line 
situations beyond ``2 to 1'' loops.
    The Complaint correctly points out that AT&T competes with SBC and 
MCI competes with Verizon pervasively across the metropolitan areas at 
issue--not just at ``2 to 1'' buildings. Complaint at ]11. In fact, 
according to the Complaint, AT&T and MCI are the most significant 
competitors for SBC and Verizon See at 17. Id. The actual bid data 
produced by wholesale purchasers of Local Private Lines confirms 
precisely what the Complaint charges: AT&T and MCI are by far the most 
significant competitors of SBC and Verizon in the Local Private Lines 
market, and competition by AT&T and MCI produces lower Local Private 
Line prices in all competitive situations--not just ``2 to 1'' loop 
situations.
    Moreover, the actual bid data produced by purchasers of Local 
Private Lines demonstrates exactly what common sense and economic 
theory suggest--that four competitors offering a particular Local 
Private Line produce lower prices than three competitors. And three 
competitors produce lower prices than just two competitors. Of course, 
the data also show that two competitors produce lower prices than a 
single vendor, but no one could rationally suggest that merely 
addressing the latter situation will do what the Competitive Impact 
Statement and Complaint indicate--elimination of the anticompetitive 
effects of the acquisition of Local Private Lines.
    If the Government's Complaint and Competitive Impact Statement 
purported to remedy ``only a small portion of the competitive injury 
caused to the Local Private Line market,'' at least the documents would 
be internally consistent. But the Final Judgment remedy addresses only 
certain ``2 to 1'' loop situations, while the Complaint and Competitive 
Impact Statement claim to ``eliminate'' the anticompetitive effects of 
the acquisitions on Local Private Lines--claims that are not only 
inconsistent with the Proposed Final Judgment, but also with the data 
gathered by the Government's investigation.
    The Government's failure to address anything other than ``2 to 1'' 
situations, while at the same time claiming to ``eliminate'' the 
anticompetitive aspects of the acquisitions, runs afoul of the 2004 
Tunney Act amendments. Moreover, the Government's actions in these 
cases are a marked departure from long-established Antitrust Division 
practices. Remedying only ``2 to 1'' situations prevents only ``mergers 
to monopoly.'' The Final Judgment remedy does not prevent the 
competitive injury caused by lessening competition (``4 to 3'' or ``3 
to 2'') in highly concentrated but not monopoly situations. For 
decades, there have been those who have argued that only ``merger to 
monopoly'' situations should be remedied by the Antitrust Division, but 
the Division for the entire period of time, on the basis of sound 
economics, has adopted both written Guidelines and consistent practices 
that recognize the competitive injury caused by reducing competition--
even if the reduction is not the elimination of all but a single 
vendor. Yet the Government in this case does an about-face and 
precludes only ``merger to monopoly,'' without any public discussion of 
this most significant departure from established and documented 
procedures.
    Furthermore, AT&T and MCI are the most significant and effective 
competitors to the acquiring companies. See Complaint ] 17. As the 
Government has long recognized, acquisitions that eliminate the most 
formidable competitors, leaving only less effective or ineffective 
competition, are anticompetitive and must be remedied. Yet in this case 
the Government assumes that the carrier purchasing the divested assets 
from the merging companies will be an effective competitive substitute 
for AT&T or MCI merely because the purchasing carrier has a ``viable, 
ongoing telecommunication business.'' Proposed Final Judgment Sec.  IV 
H. Given that AT&T and MCI are the most significant competitors for SBC 
and Verizon, there is no basis for the assumption that any acquiring 
carrier will be even a remotely effective competitor. All competitors 
are not equally effective; merely giving customers a second choice does 
not mean that the second choice is meaningful. The Government's prior 
practice recognized these facts, but the current proposal is to the 
contrary.
    Finally, and most significantly, the proposed remedy denies widely 
accepted principles of network economics that the Government has long 
recognized in its Guidelines and practices. AT&T and MCI were the most 
effective competitors of the acquiring companies because of the breadth 
of the AT&T and MCI networks and the robustness of their customer base 
in terms of network traffic. It was these factors, not the presence of 
AT&T or MCI on a particular loop circuit, that made those companies 
effective competitors. These factors enabled AT&T and MCI to offer loop 
and

[[Page 17185]]

transport circuits to wholesale purchasers at lower prices than other 
carriers. The fact that a ``viable, ongoing telecommunications 
business'' will purchase divested lines does not in any sense mean that 
those lines will be offered to the wholesale market at the same low 
prices at which AT&T and MCI sold the lines.
    Given that the acquiring company is certain to be significantly 
smaller than AT&T or MCI (as the Complaint indicates at ]17), the only 
rational inference is that the prices for the lines will go up and 
competition will be damaged, even if two carriers present choices on 
ever loop circuit. Of course, this conclusion does not merely rest on 
rational inferences or even on the allegations in the Complaint. Data 
gathered by the Government during its investigation demonstrate that 
AT&T and MCI were far and away the low price sellers for Local Private 
Lines at wholesale, and the prices for such lines will increase 
enormously in the future. The Government's proposal does not remedy 
those facts; it does not even address them.

A Truly Effective Remedy Will Produce No Loss in Efficiency

    The Complaints correctly state that AT&T's local networks (every 
single loop and transport circuit in every metropolitan area) are 
wholly redundant with those of SBC. Complaint ]]11, 12-17. MCI's local 
networks (every single loop and transport circuit in every metropolitan 
area) are wholly redundant with those of Verizon. Even the most modest 
effective remedy would include the divestiture of all of the redundant 
loop and transport circuits Such a divestiture might at least enable 
the acquiring carrier to offer a significant competitive alternative to 
the merged corporations.
    Even assuming that the mergers produce some efficiencies by 
combining the local networks of SBC and Verizon with the long-distance 
networks of AT&T and MCI, a divestiture of all redundant local assets 
would not interfere at all with the realization of the claimed 
efficiencies. It would, on the other hand, produce a viable competitor 
for local traffic without sacrificing any benefit the mergers allegedly 
produce.
    To make the divestitures competitively effective, the Government 
should enable any customer under an old contract to the merging 
companies to solicit and accept new, post-divestiture competitive 
offers. Otherwise, the divestitures will not provide any benefits to 
existing customers of the merging companies.
    And, as both an interim step and a more complete remedy if the 
Government is not going to require any meaningful divestitures, the 
Government should, at a minimum, expressly prohibit the merged 
companies from raising prices to anticompetitive levels in the 
wholesale market for Local Private Line services. This is a remedy 
recently adopted by the Commonwealth of Virginia's State Corporation 
Commission in response to public protests and concerns regarding the 
impact of the loss of an ``independent MCI'' on the provision of local 
services to mid-sized business customers in Virginia. See Order 
Granting Approval, Virginia State Corporation Commission, Oct. 6, 2006, 
at 27.
    Following a thorough staff investigation, public hearings and 
written submissions, the Virginia Corporation Commission required MCI, 
post-merger, to continue to offer wholesale customers in Virginia 
private line loop and transport facilities ``at pre-merger terms and 
conditions and at prices that do not exceed pre-merger rates.'' Id. The 
Commission made this order applicable to both ``existing and future 
wholesale customers of MCI in Virginia'' thereby preserving a wholesale 
market for Local Private Lines in Virginia at competitive rates. Id. at 
27. The order is to remain in effect until the loss of MCI as a 
competitor will no longer raise rates on Local Private Lines to an 
anticompetitive level. Id.
    This remedy is currently in effect in Virginia and must be obeyed 
by the merging companies. Extending the remedy nationwide would in no 
way prevent the merging parties from fully exploiting any efficiencies 
the merger might produce. However, a nationwide remedy of this type 
would prevent the merged companies from gouging their wholesale 
customers with higher than competitive rates. Unless the merged 
companies have the intention to raise prices post-merger, it is 
difficult to see any objection to this remedy.\13\
---------------------------------------------------------------------------

    \13\ The FCC provided price protection to existing customers 
under contract with the merging parties for a short period of time 
after the mergers. But the FCC remedy does not preserve a 
competitive wholesale market. Rather, by only protecting existing 
contracts and not bids to new customers, the FCC simply postponed 
the date at which the merging parties will be able to raise their 
customer's prices.
---------------------------------------------------------------------------

Conclusion

    The whole point of a divestiture remedy is to permit a free market 
solution (after the divestiture) to resolve the concentration issues 
created by the merger. But the divestiture remedy proposed by the 
Government has no hope of achieving that result. At a minimum, 
facilities need to be divested in operating units over wide areas, 
probably nationwide, and at the very least regionwide, to enable the 
competitive carrier acquiring the assets to have even a reasonable 
chance to replacing the competitive pricing from MCI and AT&T lost by 
the acquisitions. And the wholesale market needs to be protected with 
interim pricing provisions while these divestitures become 
competitively effective.
    From the perspective of remedies, the acquisitions now before the 
Courts bear a strong resemblance to the Government's controversial 
clearance of Thomson's acquisition of West Publishing Company a decade 
ago. There, as here, the greatest concern was that the acquisition 
would put the two principal competing systems (here, the competing 
local networks) under common ownership. There, as here, counsel for the 
merging companies argued for piecemeal divestiture properties, rather 
than something more substantial.
    In the West deal, the Government adopted the approach sought by the 
merging companies, requiring divestiture of piecemeal properties, 
rather than a comprehensive set of properties that could be used in the 
marketplace to actually produce competitive benefits. The result, in 
terms of antitrust enforcement, was a wholly ineffective remedy. See, 
e.g., John E. Morris, How the West Was Won, The American Lawyer, 
September 1996. The District Court ultimately approved the remedy with 
modifications, but under the constraint of the Court of Appeals 
authority subsequently repudiated by Congress. See United States v. 
Thomson Corp. and West Publishing Co., 949 F. Supp. 907 (D.D.C. 1996).
    The American Lawyer characterized the West Settlement process as a 
``microanalysis of competition'' in which the Government became 
``obsessed with the competing seedlings and overlooked how the giants 
of the forest can block out the light,'' attributing this result to the 
actions of Thomson's lawyers in deftly maneuvering the merger through 
the government review process.''
    In the years following the consummation of the West acquisition, 
prices to customers rose dramatically, just as critics predicted, 
producing further criticism of the Division's

[[Page 17186]]

decision.\14\ And when it came to light that the Division's clearance 
of the deal coincided with extensive political maneuvering, criticism 
reached both the largest mass circulation media \15\ and even the most 
prestigious legal publications. See, e.g., Mark Hansen, A Question of 
Influence, 83 American Bar Association Journal 36, June 1997.
---------------------------------------------------------------------------

    \14\ See, e.g., Susan M. Ryan, Cost Inflation by Page 
Reductions, 14 The Bottom Line: Managing Library Finances, No. 1, at 
pp. 6-11 (2001); Douglas McCollam, Volumes Are Giving Way to 
Velocity, 25 National Law Journal, No. 46 at S1, July 14, 2003.
    \15\ See, e.g., Brooks Jackson, Moving Money Through State 
Capitals, CNN, April 11, 1997;  http://www.cnn.com/ALLPOLITICS/1997/04/11Jackson/; Viveca Novak and Michael Weisskopf, The http://www.cnn.com/ALLPOLITICS/1997/04/14/time/novak.html: Mark Hansen, A 
Question of Influence, 83 A.B.A.J. 36, June 1997.
---------------------------------------------------------------------------

    There is much in the current situation to suggest precisely these 
concerns-- the very concerns voiced by Congress is overruling the 
District of Columbia Circuit in 2004--``political pressure to enter 
into a `sweetheart settlement.' '' \16\ Department of Justice clearance 
of these telecommunication acquisitions followed extensive lobbying by 
the merging companies of both the Administration and Congress. Indeed, 
the acquisitions were brought to a head and cleared by the Antitrust 
Divisions at a time when there was not a confirmed head of that group--
when the Administration's designated Assistant Attorney General was 
awaiting confirmation and was subsequently under Senatorial ``hold'' 
because, according to the press, of his more serious enforcement 
mentality.
---------------------------------------------------------------------------

    \16\ 150 Cong. Rec. Sec.  3617, supra.
---------------------------------------------------------------------------

    There is no reason to repeat the problems of West/Thomson. Remedial 
relief can be achieved in these cases with minimum disruption and 
inconvenience to either the merging companies or business customers.

Attachment 2--Comments of COMPTEL

    Pursuant to the Antitrust Procedures and Penalties Act (i.e., the 
``Tunney Act''),\1\ COMPTEL hereby files these comments explaining why 
the Proposed Amended Final Judgments (PAFJs or PAFJ) resolving 
simultaneous Complaints filed by the United States to prevent the 
acquisition of AT&T Corp. by SBC Communications Inc., and the 
acquisition of MCI, Inc. by Verizon Communications, Inc. do not replace 
the competition lost from the elimination of AT&T and MCI as the two 
most significant competitors to SBC and Verizon.\2\ Because the PAFJs 
do not address the harm alleged by the DOJ in the Complaints, entry of 
the PAFJs is not in the public interest. Therefore, absent significant 
amendment of the PAFJs, the Court will have no option but to reject the 
PAFJs as filed. The DOJ has the ability to recognize the deficiencies 
in the PAFJs at this stage of the proceedings. These comments are 
intended to elucidate the short-comings of the PAFJs and facilitate a 
more appropriate ``divestiture.'' COMPTEL's members are the primary 
remaining customers and competitors of the surviving entities of the 
respective mergers, and, therefore, have a strong interest in securing 
appropriate divestiture relief.
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    \1\ 15 U.S.C. 16(b)-(e).
    \2\ Although AT&T and SBC are now known as AT&T (while Verizon 
retained its name after its acquisition of MCI), we refer to each by 
their pre-merger names in these comments (unless otherwise 
indicated) to avoid confusion.
---------------------------------------------------------------------------

Introduction

    The simultaneous acquisition of the nation's largest local 
competitors by the two largest incumbent providers should have 
initiated one of the nation's most extensive antitrust inquiries. 
Instead, as COMPTEL explains below, the DOJ has failed to fully 
recognize the anticompetitive effects of the merger in the single 
product market for which it has chosen to bring suit--the market for 
dedicated intra-city transmission services, typically referred to as 
``Special Access'' or ``Local Private Line''--and has devised a remedy 
that directly conflicts with, and falls woefully short of, the basic 
tenants of its own Merger Remedy Guidelines and the mandates of Supreme 
Court precedent to restore competition to the level prior to the 
merger.
    The Tunney Act governing this proceeding was adopted to ensure that 
the settlements of civil antitrust suits by the Department of Justice 
are in the public interest. Congress specifically amended the Tunney 
Act in 2004 to emphasize that it expected an independent judiciary to 
oversee proposed settlements to ensure that the needs of the American 
consumer were met. Implementing Congress' unequivocal reaffirmation of 
the Tunney Act's requirement of independent judicial scrutiny is 
critical in the review of these simultaneous--and competitively 
interrelated--mergers that will reconcentrate the telecommunications 
market to a level unseen since the AT&T divesture just over twenty 
years ago. By permitting these mergers to occur with minimal or no 
modifications to the PAFJs, the DOJ is effectively reversing that 
historic divestiture. As he implemented the Tunney Act in that original 
AT&T case, Judge Greene admonished that:

    [i]t does not follow * * * that courts must unquestionably 
accept a proffered decree as long as it somehow, and however 
inadequately, deals with the antitrust and other public policy 
problems implicated in the lawsuit. To do so would be to revert to 
the ``rubber stamp'' role which was at the crux of the congressional 
concerns when the Tunney Act became law.

U.S. v. American Telephone and Telegraph, 552 F.Supp. 131, 151 (D.D.C. 
1982), aff'd sub nom., Maryland v. U.S., 460 U.S. 1001 (1983).
    In the comments that follow, COMPTEL explains that the proposed 
settlements of these mergers blindly ignore both the DOJ's Merger 
Guidelines and Merger Remedy Guidelines. In order to demonstrate that 
the proposed settlements serve the public interest, the DOJ must 
present a clear and compelling explanation as to how its proposed 
remedies have any hope of restoring the competition that will be lost 
by these dominant firms each acquiring their largest competitive 
rivals. The remedies crafted by the DOJ are not sufficient to restore 
competitive conditions the merger would remove; they do not promote 
competition (but they do protect the largest, post-merger 
``competitors,'' SBC and Verizon); and they lack sufficient clarity and 
specificity to be enforceable. As currently crafted, the proposed 
consent decrees are not in the public interest.

II. Summary of Complaint

    Any conventional antitrust analysis begins by defining the relevant 
product and geographic markets. In its complaints here, however, the 
DOJ adopts a clear definition of only the product market, while 
dismissing the importance of correctly establishing the geographic 
market. As COMPTEL explains, the DOJ's failure to identify the relevant 
geographic market is one of the reasons that its proposed remedy cannot 
plausibly be expected to restore competition to pre-merger levels.

A. The Product Markets

    The Government defines two product markets: (1) ``Local Private 
Lines'' (more commonly referred to as ``special access''), and (2) the 
retail voice and data telecommunications services that rely on Local 
Private Lines. Complaint at ] 19. The DOJ describes ``Local Private 
Lines'' as dedicated, point-to-point circuits offered over copper and/
or fiber optic transmission facilities (copper or fiber wires), and 
notes that the Bell monopolies use the term ``special access'' to refer 
to this product market. Complaint at ] 13.\3\
---------------------------------------------------------------------------

    \3\ The term ``special access'' is a byproduct of the initial 
AT&T divestiture. The basic structure of the Modified Final Judgment 
(MFJ) implementing the AT&T divestiture was the structural 
separation of AT&T's intercity long distance operations from its 
local exchange operations. In order for AT&T and other long distance 
carriers to meet the specialized needs of very large business 
customers, they would need to lease local transmission facilities 
from the divested Bell Operating Companies (such as Verizon and SBC) 
to connect to large users. These connections were referred to as 
``special access'' because they were used to connect specific, 
individual business customers to the long distance carrier's network 
and were designed to be used where the customer had large volumes of 
data and/or voice traffic.

---------------------------------------------------------------------------

[[Page 17187]]

    For the first product market--Local Private Lines or Special Access 
\4\--the DOJ provides some description of the competition foreclosed by 
the merger. The Complaint against SBC and AT&T, for example, notes that 
SBC dominates this market with $4.4 billion in sales in 2004, as 
compared to AT&T's local private line revenues (as one of SBC's largest 
competitors) of $0.09 billion in the SBC region. Complaint at ] 20.\5\ 
The Complaint does not indicate what portion of SBC's $4.4 billion in 
sales are to AT&T--indeed, the complaint does not even acknowledge that 
two of the largest purchasers of special access are the acquired 
firms--or whether any of these circuits are then combined with AT&T's 
own facilities and resold to other carriers or business consumers. 
However, it is certain that these sales are significant in size \6\ and 
competitive implication.\7\
---------------------------------------------------------------------------

    \4\ As the DOJ notes, Verizon and SBC generally use the term 
``special access'' to refer to Local Private Lines. Complaint at 
]13. This term is more commonly used by the industry because the 
principal use of such facilities is a wholesale input to another 
carrier that provides retail service to the customer. (While some 
business customers purchase Local Private Line services, the primary 
customers for Local Private Line are other carriers. Complaint at 
]23.) Because the term ``special access'' better captures the 
predominant use of such facilities, and because it is term more 
commonly used by the industry, COMPTEL will generally use the term 
in these comments in place of the DOJ's ``Local Private Line'' 
nomenclature.
    \5\ Similar allegations are made against Verizon and MCI.
    \6\ While we do not know with specificity the actual dollar 
volume of AT&T's purchases of SBC special access, we do know that 
they have a minimum commitment level of $765 million in special 
access purchases form SBC. See AT&T ex parte at 5, filed with the 
Federal Communications Commission in RM-10593 November 9, 2004. A 
copy of AT&T's submission is attached as Appendix A.
    \7\ COMPTEL explains later in these comments that the proposed 
merger creates a unique interrelationship between Verizon and SBC. 
By acquiring the special access contracts of AT&T and MCI (the 
largest purchasers of special access), Verizon and SBC will become 
one of each other's largest competitors and customers. Because both 
Verizon and SBC must rely heavily on inputs (i.e., special access) 
acquired from one another to compete with each other, both carriers 
have built-in supply mechanisms that monitor the competitive output 
of the other, providing a very real danger of coordinated pricing. 
In addition, special access contracts have volume-discounted pricing 
schedules that discourage each firm from using competitive input 
suppliers even when they are available. Notably, the DOJ's 
competitive analysis completely ignores the competitive symbiosis 
between SBC and Verizon that the mergers will create.
---------------------------------------------------------------------------

    The Complaint further explains that one ``element'' of Local 
Private Line service is the so-called ``loop'' or ``last mile'' which 
is the portion of copper--more likely, fiber--that provides the 
dedicated connection from one part of the network to the end-user's 
building. Complaint at ] 12. What is not explained in the Complaint is 
that there are other elements of special access service that must 
typically be purchased in order for the special access line to be 
commercially useful. The other principal element of special access 
service is ``transport.'' Transport is the transmission component 
typically used to collect ``loop'' traffic at one point on the network 
and transport that traffic to another point on the carrier's 
network.\8\
---------------------------------------------------------------------------

    \8\ For example, a carrier might use a loop-transport-loop 
service connecting Georgetown University's Law School on Capitol 
Hill with its main campus in Georgetown (2 ``end points'' with 
transport in the middle). Alternatively, a wireline carrier might 
provide only transport (i.e., no loops to a retail customer) between 
a cell site tower and a mobile telephone switching center.
---------------------------------------------------------------------------

    The second product market that the Government alleges will be 
harmed as the result of this merger is the market for retail voice and 
data telecommunications services that rely on special access. The DOJ 
provides no discussion as tot he value of this market, or the relative 
market shares of the relevant firms within the territories served by 
SBC and Verizon. This fundamental failure in analysis makes an 
appropriate Tunney Act public interest determination very difficult, if 
not impossible. While the DOJ makes no effort at all to describe the 
size of this market, it is clearly substantial.\9\ Thus, restoring 
competition lost as the result of the elimination of such a significant 
competitor would likely demand a significant divestiture of a 
cognizable business unit. It is not surprising that the DOJ chose not 
to provide any specifics on this product market, given the extremely 
limited value of the ``divestitures'' the decree proposes.
---------------------------------------------------------------------------

    \9\ For instance, AT&T earned $22.6 billion in business revenue 
in 2004. The fact that approximately \1/3\ of the nation's total 
access lines are in the territory served by SBC suggests that the 
value of retail voice and data communications that rely on private 
lines provided by AT&T are worth approximately $7 billion. SBC's 
retail business revenues from voice and data communications are 
likely to be equally as large as AT&T's. Commenters should not, 
however, have to estimate this information. It needs to be provided 
by DOJ to permit an appropriate review of the PAFJs. The Verizon/MCI 
PAFJ is equally deficient in providing necessary data to perform a 
meaningful competitive analysis.
---------------------------------------------------------------------------

B. The Geographic Market

    Despite its analytical significance, the DOJ fails to clearly 
identify the relevant geographic market for special access (and the 
retail services that rely upon it). Rather, the DOJ merely notes that 
the relevant geographic markets for both product markets are ``no 
broader than each metropolitan area and no more narrow than each 
individual building.'' Complaint at ] 24. Importantly, as COMPTEL 
explains below, the DOJ's analysis ignores the significance of 
regionwide contracting strategies in its analysis of geographic markets 
entirely, and has designed a building-specific remedy approach without 
offering any convincing explanation as to why a building-specific 
market definition is preferred to its metropolitan area alternative.
    To begin, focusing ``solely on demand substitution factors--i.e. 
possible consumer responses'' \10\--within the reality of the special 
access/Local Private Line market, it is difficult to understand how the 
DOJ could define a geographic market as narrowly as an individual 
building. As an initial matter, the only customers for whom this could 
be true would be customers whose demand was individually large enough 
to stimulate alternative entry,\11\ but whose total demand was 
sufficiently concentrated in that specific building for it to be 
willing to contract for service in that individual building alone.\12\ 
Yet, the DOJ has made no allegation that SBC (or Verizon) pre-merger, 
or post-merger, engage in building specific price

[[Page 17188]]

discrimination.\13\ Nor is COMPTEL aware of any evidence that would 
support a geographic market definition that narrow and the Competitive 
Impact Statement filed with the PAFJs does not provide any such 
evidence. Indeed, in COMPTEL's experience, the fact that Verizon and 
SBC offer special access service on state or regionwide volume discount 
schedules suggests that it is more likely that the appropriate 
geographic market is actually broader than the metropolitan area 
alleged by the DOJ (and cannot plausibly be considered to be as small 
as an individual building).\14\ As explained by former DOJ and FCC 
chief economist Joseph Farrell:
---------------------------------------------------------------------------

    \10\ Merger Guidelines, Section 1.0.
    \11\ AT&T has previously explained that it would need over 2,016 
voice grade lines (which is the voice grade equivalent of a small 
fiber-system known as an OC-3--in an individual location in order to 
justify building facilities into that location. AT&T Petition for 
Rulemaking To Reform Regulation of Incumbent Local Exchange Carrier 
Rates For Interstate Special Access Services, Reply Declaration of 
Janusz A. Ordover & Robert D. Willig on Behalf of AT&T Corp. at ] 
29, filed with the Federal Communications Commission in RM-10593 on 
January 23, 2003.
    \12\ Most customers do not typically contract for special 
access-based services on a building-by-building basis. Rather, as 
SBC has explained to the FCC, ``the overwhelming majority of special 
access circuits are purchased by customers that bargain for 
substantial term, volume, and overlay discounts.'' SBC Reply 
Comments at 26, filed with the Federal Communications Commission in 
the Matter of Special Access Rates For Price-Cap Local Exchange 
Carriers, WC Docket No. 05-25 on July 29, 2005 (internal citations 
omitted). Moreover, [t]hese contract tariffs vary in their scope, 
covering a single MSA, multiple MSAs, or SBC's entire service 
territory.'' SBC Comments at 53 n.176 filed with the Federal 
Communications Commission in In the Matter of Special Access Rates 
For Price-Cap LECs, WC Docket No. 05-25 on June 13, 2005.
    \13\ Normally, the DOJ would only define geographic markets this 
narrowly if a ``hypothetical monopolist'' could identify and price 
differently to buyers in these buildings. See Merger Guidelines, 
Section 1.22 ``Geographic Market Definition in the Presence of Price 
Discrimination.''
    \14\ Although the correct geographic market definition is 
probably the entire SBC or Verizon region, for purposes of this 
filing, COMPTEL will adopt the largest geographic market asserted by 
the DOJ in its Complaint (the metropolitan area) when evaluating the 
adequacy of the DOJ's remedy. Complaint at ] 24.

    15. I understand that, today, SBC's pricing does not fully 
respond to such granular competitive conditions, building by 
building, and that SBC is content to price well above CAPs 
[Competitive Access Providers] where it does face CAP competition 
and offers substantial discounts in return for region-wide 
commitments to give SBC not simply a large amount of business but a 
large share of the carrier's business.
    16. Such a pricing practice links special access pricing in 
different buildings, and--while it persists--argues for a region-
wide market definition because (as I explain below) it can make 
region-wide concentration a more important determinant of 
competitive behavior and overall pricing than concentration and 
entry possibilities specific to a building or route.\15\
---------------------------------------------------------------------------

    \15\ Statement of Joseph Farrell attached to the Opposition of 
Global Crossing filed with the Federal Communications Commission in 
In the Matter of SBC/AT&T Merger, WC Docket No. 05-65 on April 25, 
2005. For the convenience of the DOJ, COMPTEL includes Professor 
Farrell's observations regarding the proper geographic market 
definition. A copy of the Statement is attached hereto as Appendix 
B.
---------------------------------------------------------------------------

C. Anticompetitive Effect

    In two brief paragraphs, the DOJ posits that the primary 
anticompetitive effects of the two largest local Bell monopolies 
acquiring their two largest competitors will be felt in those few 
buildings where the number of carriers serving the buildings with their 
own fiber or copper transmission facilities will decline from two to 
one. The DOJ explains that even though other competitors might still be 
able to resell private lines from SBC, these competitors would not be 
as effective at constraining the post-merger firm's prices to 
customers, because the merged firm will control the price of a critical 
input. Complaint at ] 25. According to the Complaint, this 
anticompetitive effect (reduced competition in a limited number of 
buildings) will not be limited to the market for ``raw'' special access 
service (unadorned transmission services), but will also distort prices 
in the market for ``finished'' telecommunications services (i.e., 
switched voice or managed data/Internet service) that use private lines 
as a critical input. Complaint at ] 26. As we discuss below, however, 
the PAFJs not only do not remedy this anticompetitive effect, but 
rather may actually exasperate it.
    The Merger Guidelines are primarily concerned with entry from the 
perspective of whether it is reasonable to expect that a post-merger, 
unilateral increase in price would be met with entry that is timely 
enough, reasonably likely, and on a sufficient scale to defeat the 
hypothetical price increase. In the Complaints, the DOJ states that 
other carriers are unlikely to replicate AT&T's last mile connections 
into the few buildings for which the merged firm has consented to make 
unused capacity available. The DOJ explains that carriers decide 
whether to build last mile facilities based on several factors:

    a. The proximity of the building to the CLEC's existing network 
interconnection points;
    b. The capacity required at the customer's location (and thus the 
revenue opportunity);
    c. The availability of capital;
    d. The existence of physical barriers, such as rivers and railbeds, 
between the CLEC's network and the customer's location; and
    e. The ease or difficulty of securing the necessary consent from 
building owners and municipal officials.

Complaint at ] 27. COMPTEL does not disagree that the point listed 
above are barriers to entry; nor does COMPTEL disagree that entry--by 
either the last mile or transport facilities--would not be sufficient 
or sufficiently timely to defeat a post-merger increase in price.
    However, COMPTEL must point out that the entry barriers the DOJ 
identifies are by no means exhaustive. It is well recognized that 
dedicated, high-capacity telecommunications networks are characterized 
by substantial economies of scale and scope.\16\ Moreover, the ``sunk'' 
aspect of the high capital costs that are characteristic of competitive 
fiber deployment are additional entry barriers.\17\
---------------------------------------------------------------------------

    \16\ In one of the early antitrust cases, this Court determined 
with respect to the local private line service offered by AT&T pre-
divestiture, ``that there are three reasons for defendants having 
achieved such clear economies of scale. First, as defendants' 
witnesses explained, higher levels of demand allow efficient use of 
high-capacity facilities and technologies which provide transmission 
service at progressively lower unit costs. Second, the process by 
which the network is configured allows for the fullest utilization 
of these high-capacity, low-cost facilities. Finally, defendants 
supply the entire spectrum of communications services, and through 
the networking principle, demand for all those services is 
concentrated or pooled so that it can be transmitted and switched 
over the same facilities. This last phenomenon is referred to by 
economists as ``economies of scope''. Economies of scope exist when 
it is cheaper to produce two or more goods or services together than 
to produce each one separately. Southern Pac. Communications Co. v. 
American Tel. & Tel. Co., 556 F. Supp. 825, 861-862 (D. D.C. 1982). 
As notes above, with SBC's acquisition of AT&T, the pre-divestiture 
AT&T has been substantially reconstituted. Furthermore, the FCC has 
found that ``Scale economies, particularly when combined with sunk 
costs and first-mover advantages * * * can pose a powerful barrier 
to entry. If entrants are likely to achieve substantially small 
levels of sales than the incumbent, then with scale economies their 
average costs will be higher than those of the incumbent, putting 
them at a potentially significant costs disadvantage to the 
incumbent. Profitable entry may not be possible if retail prices are 
close to the incumbent's average costs. The greater the extent and 
size of the scale economies throughout the range of likely demand, 
the higher the barrier they pose.'' In the Matter of Review of the 
Section 251 Unbundling Obligations of Incumbent Local Exchange 
Carriers, Report and Order on Remand, 18 FCC Rcd. 16978 at ] 87 
(2003), vacated in part (on other grounds), aff'd in part and 
remanded sub nom. United States Telecom Association v. Federal 
Communications Commission, 359 F.3d 554 (D.C. Cir. 2004), cert. den. 
sub nom. AT&T Corporation v. United States Telecom Association, 125 
S. Ct. 316 (2004).
    \17\ The existence of high, or proportionately high, sunk costs 
is generally recognized as a barrier to entry. See, e.g., Larson, An 
Economic Guide to Competitive Standards in Telecommunications 
Regulation, I CommLaw Conspectus 31, 52 (January 2000) (``if entry 
requires the incurrence of capital costs, and a `high' proportion of 
these are sunk costs for entrants, then entry barriers exist.'' 
(c.f., Bolton, Brodley, and Riordan, Predatory Pricing: Strategic 
Theory and Legal Policy, 88 Geo. L.J. 2239, 2265 (August, 2000) 
(``if challenged by new entry, the incumbent will rationally 
disregard such [sunk] costs in its pricing decisions rather than 
lose the business. The entrant * * * must now incur such costs, and 
therefore faces risk of underpricing by an incumbent with sunk 
costs. Thus, as a result, sunk costs may act as an entry barrier, 
giving the incumbent the ability to raise price above the 
competitive level.'') The FCC has specifically found that ``[s]unk 
costs, particularly when combined with scale economies, can pose a 
formidable barrier to entry.'' In the Matter of Review of the 
Section 251 Unbundling Obligations of Incumbent Local Exchange 
Carriers, Report and Order on Remand, 18 FCC Rcd. 16978 at ] 88.
---------------------------------------------------------------------------

    Importantly, however, these and the other barriers the DOJ 
identifies are similar for all transmission facilities, regardless of 
whether they are ``loops'' or ``transport;'' and the inability of entry 
to defeat a post-merger price increase in the metropolitan area is just 
as much (actually more) of a danger than the threat of building-
specific price

[[Page 17189]]

increases. (As COMPTEL has explained, the DOJ has not offered any 
evidence that building-specific pricing by SBC and Verizon is the 
norm). Consequently, while the DOJ has recognized that the conditions 
for post-merger price increases are present, it has failed to fashion 
any reasonable remedy that would prevent such increases from occurring.

III. The Proposed Divestitures Will Not Restore Competition

    The formal policy guidance to the Antitrust Division regarding 
merger remedies is contained in the Antitrust Division Policy Guide to 
Merger Remedies [``Merger Remedy Guide''].\18\ In this policy 
statement, the Antitrust Division sets forth broad principles that it 
claims will guide its decisions to seek remedies to offset potential 
harms to competition resulting from mergers. A controlling policy 
principle is that ``restoring competition is the `key to the whole 
question of antitrust remedy.' '' \19\
---------------------------------------------------------------------------

    \18\ Antitrust Division Policy Guide to Merger Remedies, U.S. 
Department of Justice, Antitrust Division, October 2004. Available 
at http://www.usdoj.gov/atr/public/guidelines/205108.htm
    \19\ Id., citing United States v. E.I. du Pont de Nemours & Co., 
366 U.S. 316, 326 (1961).
---------------------------------------------------------------------------

    Importantly, the goal of restoring competition is not a policy 
choice made by the DOJ. Rather, it follows from the guidance provided 
by the Supreme Court that ``relief in an antitrust case must be 
efffective to redress the violations and `to restore competition' [and 
that] * * * [c]omplete divestiture is particularly appropriate where 
asset or stock acquisitions violate the antitrust laws.'' Ford Motor 
Co. v. United States, 405 U.S. 562, 573 (1972); accord United States v. 
E.I. du Ponte de Nemours & Co., 366 U.S. 316, 331 (1961); California v. 
American Stores Co., 495 U.S. 271, 280-81 (1980).
    The DOJ has followed this policy and precedent time and time again 
in divestitures across various industries including telecommunications. 
In previous telecommunications mergers in which the DOJ has negotiated 
remedies, the divested assets included not just network infrastructure, 
but also customer contracts, business and customer records and 
information, customer lists, accounts, leases, patents, licenses, and 
operational support systems--in essence complete operating businesses. 
For example, in U.S. v. Cingular Wireless Corp. et al., DOJ required 
the divesture of AT&T Wireless's entire mobile wireless business in the 
identified geographic markets to prevent the substantial lessening of 
competition for mobile wireless services. See U.S. v. Cingular Wireless 
Corp. et al., No. 1:04CV01850, Proposed Final Judgment (D.D.C. November 
3, 2004). Similarly, in U.S. v. WorldCom, Inc. and Intermedia 
Communications, DOJ required WorldCom to divest all Intermedia assets, 
except for the voting interest in Digex, as an ongoing, viable business 
to prevent the substantial lessening of competition in the market for 
Tier 1 Internet backbone services. Again, the required divestiture 
included customer contracts, operational support systems and each of 
the aforementioned assets among a host of others. U.S. v. WorldCom, 
Inc. and Intermedia Communications, No. 1:00CV02789, Proposed Final 
Judgment (D.D.C. November 17, 2000). See also U.S. v. SBC 
Communications Inc. and Ameritech Corp., No. 99-0715, Proposed Final 
Judgment (D.D.C. March 23, 1999). (DOJ required divestiture of an 
entire business including the assets listed above). Most recently, only 
one year prior to the present mergers being field with the DOJ, the DOJ 
was perfectly willing to follow its own counsel in the case of Qwest--
another large incumbent local exchange carrier, but substantially 
smaller than either SBC or Verizon--seeking to acquire Allegiance 
Telecom in a bankruptcy proceeding. There, the DOJ signed a consent 
decree with Qwest that required Qwest to entirely divest itself of all 
of Allegiance's in-region business.\20\
---------------------------------------------------------------------------

    \20\ Ultimately, Qwest was out-bid in a bankruptcy auction by XO 
Communications and the consent decree was not filed. The proposed 
consent decree is provided here as Appendix C to illustrate a 
divestiture approach more consistent with the public interest than 
that to which the DOJ has acquiesced here.
---------------------------------------------------------------------------

    A key question underlying the DOJ's approach here is simply ``what 
happened?'' Why is the guidance of its Merger and Remedy Guidelines--
guidance to which the DOJ has consistently adhered in merger after 
merger, involving firms far smaller than those being combined here--no 
longer relevant to its analysis? \21\ As we explain below, the 
divestitures required under the proposed final judgments cannot 
plausibly restore the competition lost by the simultaneous acquisition 
of the nation's two largest competitors by the nation's two largest 
incumbents, much less do the divestitures even hint at addressing the 
heightened threat of coordinated pricing resulting from SBC and Verizon 
becoming each other's largest customer and competitor.
---------------------------------------------------------------------------

    \21\ COMPTEL is not so na[iuml]ve as to believe that the massive 
size of the merged entities in these proceedings is necessarily 
unrelated to the Government's approach. Mergers concentrate 
political capital in a manner comparable to their amalgamation of 
economic power--a fact Senator Tunney well recognized ``[i]ncreasing 
concentration of economic power, such as occurred in the flood of 
conglomerate mergers, carries with it a very tangible threat of 
concentration of political power. Put simply, the bigger the 
company, the greater the leverage it has in Washington.'' 119 Cong. 
Rec. 3451 (Feb. 6, 1973).
---------------------------------------------------------------------------

    The DOJ's Merger Remedy Guide makes clear that the preferred course 
to restore competition is to divest sufficient assets to replace the 
competition lost by the merger, recognizing that such divestitures will 
likely require more than mere physical assets:

    Divestiture must contain at least the minimal set of assets 
necessary to ensure the efficient current and future production and 
distribution of the relevant product and thereby replace the 
competition lost through the merger. The Division favors the 
divestiture of an existing business entity that has already 
demonstrated is ability to compete in the relevant market. An 
existing business entity should possess not only all the physical 
assets, but also the personnel, customer lists, information systems, 
intangible assets, and management infrastructure necessary for the 
efficient production and distribution of the relevant product.\22\
---------------------------------------------------------------------------

    \22\ Merger Remedy Guide at 12.
---------------------------------------------------------------------------

    The goal of a divestiture is to ensure that the purchaser 
possesses both the means and the incentive to maintain the premerger 
competition in the market(s) of concern.\23\
---------------------------------------------------------------------------

    \23\ Merger Remedy Guide, at 9.
---------------------------------------------------------------------------

    Divestiture of an operating, on-going business redresses the 
antitrust violations and restores competition in the affected 
market.\24\ Significantly, the ``divestitures'' required by the consent 
decrees are not real divestitures at all (as the term is used to effect 
a ``structural remedy'' in the Merger Remedy Guide). Rather, the 
proposed decrees call only for a ten-year lease of the defendant's 
unused fiber capacity--capacity that is dormant cannot be made useful 
without substantial additional investment--and which only connects to 
buildings where the available revenue is already locked into long-term 
contracts with the defendants, most likely through a contract tying the 
service in the named building to the customer's requirements in other 
locations. This temporary lease of the defendants' unused capacity to a 
carrier that has neither the scale nor scope of the defendants cannot 
restore the level of competition lost by the acquisition of AT&T and 
MCI.
---------------------------------------------------------------------------

    \24\ Id.
---------------------------------------------------------------------------

A. A Building-Specific Remedy Is Insufficient

    To begin, although the DOJ was unable to define the relevant 
geographic market with precision--concluding only that it was no 
smaller than an

[[Page 17190]]

individual building and no larger than a metropolitan area, the DOJ's 
``remedy'' assumes that individual buildings are the appropriate 
measure. Moreover, the proposed final judgments only apply in those 
relatively few buildings where the merging parties control the only 
facilities serving the building (i.e., where because of the merger, the 
number of facility-paths to the building will go from 2-to-1). 
Notwithstanding the lack of any explanation of why only the ``2:1'' 
buildings are of concern (as opposed to circumstances where competitive 
choice collapses from 3:2 for instance), the DOJ's focus on a building-
specific remedy assures higher prices to retail customers.
    As noted earlier, COMPTEL is unaware of any market evidence that 
suggests that customers make purchasing decisions--or that carriers 
make pricing decisions--on a building-by-building basis. If customers 
do not make their decisions that way, and carriers do not price their 
services that discretely, there is no reasoned basis to conclude that 
the remedy can restore competition when the market has been incorrectly 
defined so narrowly.
    In COMPTEL's experience, customers make their purchasing decisions 
for much broader areas that generally conform to the areas that the 
incumbents use to calculate volume discounts. Even if one assumes that 
a relatively (compared to our experience) narrow market definition of a 
single metropolitan area is appropriate, the only way to restore the 
competition lost by the mergers is to divest all of the AT&T and MCI 
network assets that serve each metropolitan area. Only if that were to 
occur, could the purchasing entrant be assured of the opportunity to 
offer customers service package with a similar footprint as provided by 
the former competitors, AT&T and MCI.
    Notably, AT&T and MCI were two of the largest purchasers of 
wholesale special access services in the territories served by SBC and 
Verizon and, as such, were able to take advantage of SBC's and 
Verizon's volume discount pricing strategies to achieve lower special 
access prices than other competitors. Because large end-user customers 
typically contract for retail services at multiple locations, AT&T and/
or MCI were able to bid on such contracts using a blend of their own 
facilities and the heavily discounted special access facilities they 
leased from SBC and Verizon. Consequently, even if leasing the unused 
capacity that exists at some of the customer's locations to other 
entrants (a term called for by the proposed consent decrees) was able 
to replicate the facilities-based competition from AT&T and MCI (a 
proposition with which we disagree, for other reasons that we describe 
here), unless other entrants also enjoyed the same discounts achieved 
by AT&T and MCI for the special access circuits used to form the 
complete bid for all of the customer's locations, the level of 
competition in the metropolitan area would be harmed and prices would 
be expected to rise.

B. The Lease of Unused Capacity Does Not Restore Competition

    Another remarkable feature about the proposed consent decrees is 
that they only require the defendants to lease the unused capacity they 
may have installed to a particular building--i.e., fiber strands that 
today lie dormant, that would require substantial additional investment 
to activate, and which quite possible exceed the known demand in the 
building to which they are committed.
    The DOJ correctly recognizes the ``CLECs will typically build into 
a particular building after they have secured a customer contract of 
sufficient size to justify the anticipated construction costs for that 
building.'' Complaint ] 28. In other words, the most common arrangement 
is for facilities to be installed only after a customer has made a 
contractual commitment of sufficient duration and magnitude to justify 
the cost. Remarkably, although the DOJ recognizes this circumstance, it 
has proposed a remedy that effectively assumes the opposite.
    In each of the buildings identified by the DOJ, there are only two 
networks available to customers (that of AT&T and MCI and that of the 
incumbent). Following the DOJ's accurate observation that competitors 
generally do not deploy capital speculatively, it is likely that AT&T 
and MCI constructed their lateral connections only after obtaining a 
contract with the customer sufficient to recover the costs of 
construction.\25\ As such, it is unlikely that there is sufficient 
uncommitted demand in any of these buildings to justify a competitor 
incurring the cost to access the building to become a ``third'' option.
---------------------------------------------------------------------------

    \25\ The FCC has found that large business customers ``demand 
extensive services using multiple DS3s or OCn loops typically 
offered under long-term arrangements which guarantee a substantial 
revenue stream over the life of the contract.'' In the Matter of 
Review of the Section 251 Unbundling Obligations of Incumbent Local 
Exchange Carriers, Report and Order on Remand, 18 FCC Rcd. 16978 at 
] 303 (2003).
---------------------------------------------------------------------------

    One obvious question is why should the DOJ presume that an entrant 
will precommit capital (to acquire a fiber-lease from the defendants) 
to serve these buildings without already having a customer under 
contract, when the DOJ recognizes more generally that an entrant would 
not otherwise take such a risk? Moreover, the economic disincentive is 
even greater in these buildings because the entrant knows that the 
capital it would be committing would be to acquire capacity at levels 
that neither the incumbent (SBC and Verizon) nor the largest 
competitors (AT&T or MCI) were able to sell. The DOJ's Merger Remedies 
Guide recognizes that ``in markets where an installed base of customers 
is required in order to operate at an effective scale, the divested 
assets should either convey an installed base of customers to the 
purchaser or quickly enable the purchaser to obtain an installed 
customer base'' \26\
---------------------------------------------------------------------------

    \26\ Merger Remedy Guide at 10.
---------------------------------------------------------------------------

    Additionally, in its Merger Guidelines, among the factors the DOJ 
lists that are likely to ``reduce sales opportunities'' to a post-
merger entrant is ``any anticipated sales expansion by incumbents in 
reaction to entry, either generalized or targeted at customers 
approached by the entrant, that utilizes prior irreversible investments 
in excess production capacity.'' \27\ Here, while the ``divestiture 
asset'' is unused capacity, it is not even all the unused capacity the 
post-merger firm will possess; so it is hardly unthinkable that the 
merged firm would not be easily able to eliminate any sales opportunity 
for the prospective entrant (assuming such a sales opportunity could 
even exist on a building-specific basis)--especially given that the new 
entrant (even if it acquired the unused capacity for free) will still 
have to incur the costs of negotiating building access, laying fiber 
within the building, and lighting the fiber. Yet, in this context, the 
DOJ has not required the defendants to divest a single customer--or 
even to waive the termination penalties associated with any contract 
that includes service in the identified buildings.\28\
---------------------------------------------------------------------------

    \27\ Merger Guidelines, Section 3.3.
    \28\ So called ``fresh look'' requirements would at least permit 
the customers using the productive capacity that the DOJ is 
permitting the merged firms to retain to consider shifting their 
demand to the unused capacity that the DOJ would have the merged 
firms divest.
---------------------------------------------------------------------------

C. A 10-year Lease is Not a Divestiture

    Above we emphasize the fact that CLECs are unlikely to install 
capacity to particular building until after the customer is locked into 
a contract suggests that the customer demand in the buildings where 
AT&T has installed

[[Page 17191]]

fiber are unlikely to be available to an entrant because of the 
customer's contractual commitments. A second implication is that an 
entrant is unlikely to want to lease dark fiber from the defendants (as 
assumed by the proposed consent decrees) precisely because the new 
entrant to the building will not have its own pre-committed customers.
    Whether the entrant leases the unused capacity required to be 
divested by the proposed settlement--or whether it constructs the 
facility new, the economic condition recognized by the DOJ remains the 
same. Entrants are unlikely to commit capital to serve an individual 
building unless a customer has already committed to cover the costs of 
that capital expansion. The fact that some dark fiber may have been 
obtained through the proposed ``divestiture'' does not substantially 
lessen this capital expenditure--there remain significant costs to 
access the customer and activate the fiber so that it is capable of 
providing services.
    The DOJ appears unwilling to appreciate the comparability between 
capital expenditures incurred as construction costs and capital 
expenditures incurred as long-term leasehold acquisition costs. The 
fact is that competitors generally do not deploy capital on 
speculation. If they do not have a contract for a satisfactory level of 
demand at a particular location, then they typically will not spend 
capital to provide facilities to that location.
    The risk to invested capital used to activate any leased fiber from 
the defendants is particularly acute. The DOJ's consent decrees only 
require a relatively short lease commitment of 10 years, without any 
renewal option. After the lease expires, the merged companies will once 
again control the assets supposed to be ``divested,'' with the entrant 
that has leased these facilities having no clear option. In addition, 
without full transfer of assets, prospective lessees will have no 
rights to access any building without first obtaining permission from 
the landlord or property manager of the building. This, again, makes 
the ability of the lessee to serve potential customers contingent on 
its ability to overcome an entry barrier that the DOJ has recognized 
and that the defendants have overcome.\29\ It is remarkable that the 
DOJ would identify an entry barrier (like building access), and then 
propose a remedy to create new entry while leaving the prospective 
entrant to still negotiate that entry barrier.
---------------------------------------------------------------------------

    \29\ There is a related, yet somewhat technical, point that 
should also be considered. The merged firms almost certainly each 
have route diversity (e.g., fiber coming in the front door and going 
out the back door). This is a valuable feature because it allows the 
carrier to protect its customer against service disruptions from 
fiber cuts (if the fiber coming into the building is cut, the 
carrier can simply ``re-route'' the customer's communications 
through the diverse fiber strand). However, there is nothing in the 
terms of the consent decrees that requires the post-merger firm to 
provide ``diverse'' fiber. Rather, the decree only requires a 
minimum of 8 strands to be divested. It appears that the post-merger 
firm could technically comply with the decree, while limiting the 
prospective purchaser's ability to win sales by only divesting fiber 
strands in the same sheath.
---------------------------------------------------------------------------

D. The Remedy Is Not Clear and Enforceable

    Among the broad, ``guiding principles'' in the Merger Remedy Guide 
is the notion that an antitrust remedy should be clear and enforceable. 
This is also a new requirement for the Court to analyze with respect to 
consent decrees under the Tunney Act--whether its terms are ambiguous, 
and therefore, whether it is enforceable. The present consent decree is 
so vague and ambiguous as to be virtually unenforceable.
    As an initial matter, almost all--if not all--of the critical 
provisions of these consent decrees are subject to subsequent agreement 
among the parties. The elements of the divestiture leases that are 
subject to ``agreement'' between the parties--pricing, splice point 
access, and access to dark fiber transport--are among the most 
contentious issues in arbitrations held pursuant to the 
Telecommunications Act of 1996. History has shown that competitive 
entrants are typically unsuccessful ``negotiating'' with the Bell 
companies, frequently having to resort to binding arbitration under the 
Telecommunications Act, 47 U.S.C. 252, even to implement basic 
interconnection and lease rights guaranteed by the statute and the 
FCC's rules implementing the statute.\30\ The PAFJs do not divest 
independent operations that have the incentive and ability to be 
willing wholesalers to other competitive providers; rather, the decrees 
portend the same seeds for litigation that have plagued the 
Telecommunications Act of 1996 for a decade (and which ultimately 
produced these mergers in the first instance).
---------------------------------------------------------------------------

    \30\ See The Role of Incentives for Opening Monopoly Markets: 
Comparing GTE and RBOC Cooperation With Local Entrants (1999) (ILECs 
that do not cooperate with entrants attract less competitive entry) 
available at http://econpapers.repec.org/paper/wpawuwpio/9907004.htm.
---------------------------------------------------------------------------

IV. The Proposed Remedy Increase the Likelihood of Coordinated Pricing

A. ILEC Exclusionary Contracts Are a Barrier To Entry and Facilitate 
Collusion Between Post-Merger SBC and Post-Merger Verizon

    COMPTEL has already shown that the DOJ has not adequately described 
all the barriers to entry in the Local Private Line market. As we have 
noted, most private lines include a transport component as well as a 
loop component.\31\ Moreover, most private lines are purchased by 
carriers, which combine these private lines with intelligence and other 
network facilities and features to create finished services that are 
then sold to retail customers. Thus, what little facilities competition 
that exists in the special access/Local Private Line market is provided 
by other carriers for other carriers. The barriers that these 
entrants--who compete directly against SBC and Verizon--face are 
enormous. The DOJ only lists some of the ``natural'' economic barriers 
to entry. There are other, artificial barriers that have been erected 
by the Bell companies, including defendants SBC and Verizon.
---------------------------------------------------------------------------

    \31\ Indeed, AT&T has explained that 40,000 of its local 
business customers require the lowest capacity private line 
service--DS1 service. The vast majority of these customers--about 
65%--are served via combinations of loops and transport. See AT&T 
Presentation, CC Docket No. 01-338, October 7, 2002, at p. 10.
---------------------------------------------------------------------------

    The most notable features about the special access market are that: 
(1) The SBC and Verizon still maintain a monopoly over the market; even 
the competitive carriers with the largest networks must buy over 90% of 
their total special access circuits (Local Private Lines) from the 
incumbents; (2) in the most populous markets, SBC and Verizon are no 
longer price regulated by the FCC; and (3) almost all of the special 
access circuits sold by SBC and Verizon are sold under ``optional 
pricing plans.'' \32\
---------------------------------------------------------------------------

    \32\ These ``optional pricing plans'' are an essential feature 
of the special access market that needs to be understood in order to 
understand why entry of the proposed consent decrees is not in the 
public interest. To this end, COMPTEL has included with its comments 
a detailed analysis of SBC's optional pricing plan, prepared by 
former DOJ and FCC chief economist Joseph Farrell. Dr. Farrell's 
pricing plan analysis is included as Appendix D to these comments.
---------------------------------------------------------------------------

    These optional pricing contracts are relevant to this proceeding 
for three reasons: (1) They are important to understand in order to 
understand proper geographic market definition; (2) they are an ongoing 
barrier to facilities-based competitive entry into the Local Private 
Line/special access market because they severely foreclose access to

[[Page 17192]]

customers and distort entry decisions; and (3) the continued existence 
of these contracts will make it even less likely that the proposed 
remedy will allow a new firm to take the place of AT&T--even if all of 
AT&T's in-region assets were divested.
    The key feature of these optional pricing plans is that in order to 
get ``discounts'' on circuits for which they have no competitive 
alternative (the vast majority of their circuits) customers (like the 
pre-merger AT&T and MCI, and COMPTEL's members) must commit to 
purchasing the majority of their total circuit volumes from the Bell 
companies--including circuits for which a cheaper competitive 
alternative may be available. In other words, because only the 
incumbent can supply all of any customer's Local Private Line demand, 
the incumbent can condition the availability of discounts on certain 
circuits (majority, for which no competitive alternative is available) 
on the customer's commitment to transfer the ``competitively 
sensitive'' portion of its demand to the incumbent.
    In this respect, the optional pricing plans--which are pervasive--
act to foreclose circuit demand from potential competitors of the 
incumbents for Local Private Line services.\33\ This feature--contracts 
that foreclose sales opportunities to rivals--is yet another factor 
that the DOJ, in its Merger Guidelines, has identified as making post-
merger entry less likely.\34\ However, the DOJ has chosen not to 
eliminate this entry barrier for the prospective IRU purchaser.
---------------------------------------------------------------------------

    \33\ See, e.g., ``Quantity-Discount Contracts as a Barrier to 
Entry,'' T. Randolph Beard, PhD, George S. Ford, PhD, Lawrence J. 
Spiwak, Esq., Phoenix Center Policy Paper No. 20 (November 2004). 
Available at http://www.phoenix-center.org/ppapers.html
    \34\ ``Factors that reduce sales opportunities to entrants 
include * * * (b) the exclusion of an entrant from a portion of the 
market over the long term because of vertical integration or forward 
contracting by incumbents * * *.'' Merger Guidelines, Section 3.3.
---------------------------------------------------------------------------

    Another feature of these contracts is that customers that cannot 
meet their volume commitments must pay high ``termination'' penalties. 
While customers do not like these contracts, they have little choice 
but to sign them.\35\ Because, as noted previously, for the densest 
metro areas the FCC no longer regulates the Bells' special access 
rates, the Bells have used this pricing flexibility to raise their 
``month-to-month'' or non-OPP prices for special access. The resulting 
effect is that customers--almost all of whom are retail competitors 
with the Bells (Local Private Lines/special access circuits are 
critical inputs to all wireline and wireless telecommunications 
services)--cannot afford to pay higher prices when their competitors 
(including the Bell affiliates) are purchasing at a ``discount.'' The 
word ``discount'' is in quotations because the discounts are discounts 
off the month-to-month tariff price, so the Bell can still charge a 
monopoly profit maximizing price (through its OPP) by establishing a 
``supra-monopoly'' price as the non-OPP alternative.
---------------------------------------------------------------------------

    \35\ ``Discount pricing plans offered by ILECs further reduce 
the ability of CLECs to compete and result in higher prices. Even 
where a CLEC may offer a competing special access service (at a 
substantial discount to the ILEC offering), WilTel may not use that 
CLEC in many cases because it can incur a lower incremental expense 
by committing additional services to an existing ILEC plan even 
though the overall unit cost from the ILEC may be higher.'' 
Declaration of Mark Chaney in support of the Comments of WilTel at ] 
6 filed with the Federal Communications Commission in In the Matter 
of Special Access Rates for Price Cap Local Exchange Carriers, WC 
Docket No. 05-25 on June 13, 2005.
---------------------------------------------------------------------------

    The most important thing to consider when trying to conceptualize 
how the optional pricing plans work, is that the incumbent--by 
exchanging ``discounts'' on products for which demand is inelastic 
(customers have no alternative) for commitments to not buy from 
competitors on products for which the customer could choose a 
competitor--gets to set the minimum scale of entry for his competitors. 
Thus the incumbent can pick demand over a large geographic region as 
the inelastic product (on which discounts are offered), or the 
incumbent could decide to ``discount'' lower capacity circuits (for 
which the incumbent's ``first mover'' status and scale/scope economies 
give it a tremendous advantage over new entrants) as the basis on which 
it will foreclose demand from rivals. Regardless, though, the end 
result is that the incumbent is able to raise the costs of its 
competitors by expanding the scale on which they would have to enter, 
or raising the size of the discount they would have to offer to make 
their customer indifferent between buying from the incumbent, and/or by 
limiting its competitors ability to expand quickly (by foreclosing 
demand).\36\
---------------------------------------------------------------------------

    \36\ See, e.g., Declaration of Michael D. Pelcovits on Behalf of 
WorldCom (as MCI was formerly known) at 7 filed with the Federal 
Communications Commission in In the Matter of AT&T Petition for 
Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier 
Rates for Interstate Special Access Services, RM-10593. (``Less than 
fully exclusive contracts can similarly be exclusionary where they 
tie up sufficient volume to prevent smaller competitors from 
achieving minimum viable scale.'') Pelcovits also uses the following 
example to explain the pricing disadvantage at which competitors 
that cannot match the incumbent's scale or scope are placed: 
``Suppose the monopoly (pre-entry) price is $1.00 and the customer 
buys 100 units. Further suppose that a competitor is capable of 
providing 25 units at a price of 99 cents, thereby threatening to 
undercut the monopolist. In response, the monopolist could offer the 
customer the choice of buying 75 units at $1.05 per unit, or buying 
all 100 units for 99 cents per unit. As a result, the customer now 
faces a price from the monopolist for the 25 ``in play'' units of 
$20.25, or 81 cents per unit. The competitor is unable to meet this 
price, and is excluded from the market.'' Id. at 7-8.
---------------------------------------------------------------------------

    Given that courts, as well, have recognized the potential for 
anticompetitive foreclosure effects in these so-called ``bundled 
rebate'' or ``bundled discount'' plans, the DOJ needs to determine what 
percentage of the wholesale (carrier) and retail markets for special 
access are foreclosed by the contracts at issue. COMPTEL believes this 
number will be significant.\37\ The D.C. Circuit has held that 
exclusionary conduct by a monopolist is more likely to be 
anticompetitive than ``ordinary'' exclusionary conduct achieved through 
non-monopoly means (i.e., agreements among competitors).\38\ Moreover, 
the Third Circuit has held that contracts almost identical to the Bell 
OPP's, when used by a monopoly, were anticompetitive and exclusionary 
in violation of the antitrust laws.\39\ The Supreme Court has held that 
a market share over 65% is sufficient to establish a prima facie case 
of monopoly power.\40\ It is certainly the case that SBC and Verizon 
would be considered monopolies, pre-merger, in the special access 
market--regardless whether the market is defined as a building or 
metropolitan area.\41\ Thus, an inquiry

[[Page 17193]]

into what proportion of special access services are sold under the 
contracts described above should be sufficient to have enough 
information to determine that as long as the defendants are allowed to 
use these contracts, the DOJ's proffered remedy has no legitimate hope 
of restoring competition lost through the mergers.
---------------------------------------------------------------------------

    \37\ SBC notes that the ``overwhelming majority'' of its special 
access circuits are sold under term and volume contracts. See n. 11, 
supra. Verizon has stated that 85% of its access sales were under 
some form of discount contract. Verizon Comments at 22 filed with 
the Federal Communications Commission in WC Docket No. 05-25 on June 
13, 2005.
    \38\ United States v. Microsoft Corp., 253 F.3d 34, 70 (D.C. 
Cir. 2001) (Microsoft's exclusionary contracts violated Section 2 
(of the Sherman Act) ``even though the contracts foreclose less than 
the 40-50% share usually required in order to establish a Sec.  1 
violation.'')
    \39\ LePage's Inc. v. 3 M, 324 F.3d 141 (3d Cir. 2003) (``The 
principal anticompetitive effect of bundled rebates as offered by 
[the defendant] is that when offered by a monopolist they may 
foreclose portions of the market to a potential competitor who does 
not manufacture an equally diverse group of products and who 
therefore cannot make a comparable offer'').
    \40\ American Tobacco Co. v. United States, 328 U.S. 781, 797 
(1946).
    \41\ Only 3 years ago, AT&T--the best-situated special access 
customer (with the largest competitive local network in any Bell 
region)--was dependent on the incumbents for 93% of its DS1-level 
transport and 65% of its DS3-level access. See Reply Declaration of 
Janusz A. Ordover and Robert D. Willig on Behalf of AT&T Corp., In 
the Matter of AT&T Petition for Rulemaking to Reform Regulation of 
Incumbent Local Exchange Carrier Rates for Interstate Special Access 
Services, FCC RM-10593, at ] 30.
---------------------------------------------------------------------------

B. The Proposed PAFJs Will Affirmatively Facilitate Collusion Between 
SBC and Verizon

    However, there is one remaining aspect to the contracts discussed 
above that independently compels the DOJ to reject the PAFJs and 
require a more complete divestiture. The effect of the contracts, post-
merger, will be to enhance the ability for the merged firms to engage 
in interdependent coordination. Post-merger each firm is the other's 
largest in-region competitor and largest out-of-region supplier. This 
new reality, in conjunction with the OPP contracts--which enforce input 
dependence on the dominant firm--leads naturally to increased 
coordination through the increased ability of each dominant firm to 
monitor each competitor for ``cheating'' and to thereby better 
facilitate coordination. The Competitive Impact Statements do not 
address, let alone explain, how coordinated effects will be prevented 
by the very limited relief proposed by the PAFJs. Effectively, four 
very large competitors, two of whom (AT&T and MCI) had every incentive 
to seek to grow share and pursue entry have been reduced to two 
historic monopolies whose incentives are much more to protect existing 
monopolies than they are to aggressively compete.

C. The Proposed Settlements Should Be Evaluated Together

    There is no question that the acquisition of AT&T and MCI by SBC 
and Verizon, respectively, will substantially lessen competition in the 
provision and sale of ``Local Private Lines'' (also known as ``special 
access'') to the wholesale market, as well as voice and data services 
that rely on Local Private Lines, with the likely result that prices 
for the Lines and services using those Lines will increase ``to levels 
above that which would prevail absent the merger(s). Complaints ]]1, 
25, 33. The Complaints conclude that, absent relief, competition will 
be diminished and prices will rise in both the wholesale and retail 
local private line markets. Complaints ]25. Although the DOJ has asked 
the Court to review the proposed settlements together, it has ignored 
the important interrelationships between the mergers and the level of 
competition. The Tunney Act Reform, however, does not allow this same 
luxury. Rather, the DOJ is required to demonstrate than ``the impact of 
entry of such judgment upon competition in the relevant market or 
markets * * * \42\'' resolves the anticompetitive effects identified in 
the Complaints.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 16(e)(1)(B) (emphasis added).
---------------------------------------------------------------------------

    The DOJ, in its Merger Guidelines, notes that a significant 
potential anticompetitive effect of mergers occurs when the mergers 
increase the ability of the remaining firms in the market to coordinate 
in ways that harm consumers. The DOJ notes that ``[c]ertain market 
conditions that are conducive to reaching terms of coordination also 
may be conducive to detecting or punishing deviations from those 
terms.'' Merger Guidelines, Section 2.1.
    COMPTEL submits that these conditions are fully satisfied in the 
case of the present mergers and the PAFJs do not remedy these 
conditions because they do not restore the competitive condition to 
pre-merger levels. The complaints recognize that AT&T and MCI are each 
among the largest competitors to both SBC and Verizon. Complaints at ] 
8. The inescapable conclusion from this fact is that post-merger, both 
SBCA and Verizon will be the largest competitor to the other. 
Significantly, however, each pre-merger carrier (i.e., AT&T and MCI) 
has explained to the FCC that it is bound by volume discount contracts 
to SBC and Verizon that effectively require that each purchase most of 
its special access services from its rival (SBC and Verizon) or be 
harmed by the loss of discounts based on regionwide commitments.\43\
---------------------------------------------------------------------------

    \43\ See, generally, AT&T and MCI filings in FCC RM-10593 and WC 
Docket No. 05-25. Attachments 4 and 5 are representative of the pre-
merger firms' concern over their dependence on SBC and Verizon 
special access--a dependence that was only magnified by the bundled 
rebate contracts.
---------------------------------------------------------------------------

    What is even more important going forward is that the contracts do 
not just act to discourage the new ``out-of-region'' competitors from 
using other competitive carriers, but the contracts act as a 
disincentive for the post-merger out-of-region competitors to use their 
own networks. Thus, the contracts serve to cement the two post-merger 
firms' interdependence, and provide a ready-made excuse as to why they 
cannot/will not compete aggressively on price in either wholesale input 
markets or in retail business or wireless markets. Moreover, these 
commitment contracts for wholesale inputs constitute a perfect 
mechanism to detect and punish cheating in the retail market, as any 
significant increase in inputs purchased can indicate that the 
competitor is experiencing an increase in retrial demand as the result 
of a decline in retail price.
    Alternatively, the post-merger dominant firms have no less of an 
information advantage in wholesale markets. Because the post-merger 
AT&T and Verizon have such a significant portion of wholesale demand 
under such contracts, they are also in a position to notice decreases 
in demand from other wholesale customers at old-AT&T or old-MCI ``on-
net'' locations. Reduced purchases by other wholesale market customers 
could easily and efficiently alert the post-merger incumbent to 
wholesale market cheating.
    Once the dominant firm has detected wholesale or retail market 
cheating, it can then perfectly signal, through either price responses 
by its own CLEC in the other Bell's region, or through output 
restrictions--quality disruptions from its ILEC to the ``maverick'' 
CLEC. Finally, these contracts ensure that the post-merger firms have a 
government-sanctioned defense to collusion.
    Unlike the pre-merger AT&T and MCI, these post-merger companies 
will never complain about the unreasonable restrictions these contracts 
place on their ability to use competitive facilities--they perfectly 
know this is the intended effect of the contracts. Moreover, they also 
know that if they just stay ``captive''--as is reasonable--then they 
can take any increase in private line rates as a signal/excuse to raise 
retail rates. Since they can expect the same consideration where they 
are the input monopolist and dominant retail firm, they have an 
incentive to provide the same consideration as an out-of-region 
competitor. This is a significant risk of harm to the public interest, 
because most telecommunications services that the post-merger firms 
will sell in each other's ILEC regions (local, long distance, voice, 
data, and wireless) rely in large part on ``Local Private Line'' 
service as a critical input.
    Finally, although it is pretty clear how the existing contracts 
enhance both firms' incentives and ability to coordinate post-merger, 
what may not be so clear is how the feckless remedy structure further 
enhances the ability of the post-merger firms to limit competition. The 
``divestiture assets'' are most likely to be interesting/valuable to a 
firm that already has a significant network in the divestiture market. 
As the DOJ explains,

[[Page 17194]]

``[p]urchasers that are already offering similar services in or near 
the metropolitan area are more likely to be viable competitors than 
other potential purchasers.'' Competitive Impact Statement at p. 6 of 
12. Moreover, the government strongly prefers a single purchaser. Id. 
Finally, the terms of the ``assets'' themselves are fairly unique--10 
yr leases for non-revenue-producing excess capacity; the ``purchaser'' 
would still have to undertake significant investment to use the assets 
by obtaining building access, laying additional inside wire/conduit, 
then ``lighting'' the fiber, and even after all that, the government is 
not requiring the defendants to let customers in the affected buildings 
out of their contracts so a purchaser could start earning revenue 
immediately. Thus, because the ``assets'' are structured to be 
attractive to a purchaser who has a greater ability to ``warehouse'' 
capacity then a ``typical'' competitor,\44\ it seems likely that AT&T 
and Verizon will be the natural higher bidders for the excess capacity 
in each other's territory.
---------------------------------------------------------------------------

    \44\ ``Because a single such connection may cost hundreds of 
thousands of dollars to build and light, CLECs will typically only 
build in to a particular building after they have secured a customer 
contract of sufficient size and length to justify the anticipated 
construction costs for that building.'' Competitive Impact Statement 
p. 5 of 12.
---------------------------------------------------------------------------

    The further expansion of AT&T and Verizon's out-of-region presence 
in the other's in-region territory through the addition of excess 
capacity only increases the means for non-detectable signaling and 
closer coordination. For example, instead of cutting prices in 
Verizon's incumbent territory to signal disapproval of Verizon's 
pricing in AT&T's incumbent region, AT&T can just take steps that make 
it look like it is preparing to activate the excess capacity in the 
discreet out-of-region buildings. In fact, the parties may find it 
useful to signal entirely through discreet bids at the locations where 
DOJ seems to expect price discrimination.

Conclusion

    COMPTEL has demonstrated that the PAFJs do not even begin to 
remedy, and may even exacerbate, the public interest harms caused by 
the elimination of the two largest competitive carriers by the two 
largest incumbent monopolies. Accordingly, the Court will be required 
to reject the PAFJs, because they cannot satisfy the Tunney Act unless 
modified to: (1) Include all of the acquired competitors' in-region 
assets as a whole business--with customers, employees, and assets; and 
(2) eliminate both post-merger firms' ability to offer ``bundled 
rebate'' style pricing to any customer, including their own long-
distance and wire less affiliates.

     Respectfully submitted,
Jonathan D. Lee, Mary C. Albert.
COMPTEL, 1900 M Street, NW., Suite 800, Washington, DC 20036-3508, 
(202) 296-6650.
BILLING CODE 4410-11-M

[[Page 17195]]

Appendix A
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BILLING CODE 4410-11-C

[[Page 17210]]

Appendix B--Statement of Joseph Farrell

    April 25, 2005.
    1. I am Professor of Economics and Chair of the Competition Policy 
Center at the University of California, Berkeley, where I am also 
Affiliate Professor of Business. In 1996-1997 I served as Chief 
Economist at the FCC. In 2000-2001 I served as Deputy Assistant 
Attorney General and chief economist at the US Department of Justice 
Antitrust Division. I am Fellow of the Econometric Society and former 
President of the Industrial Organization Society. From 2001 to 2004 I 
served on the Computer Science and Telecommunications Board of the 
National Academics of Science. My curriculum vitae is attached as 
Appendix 1.
    2. I have been asked by counsel for Global Crossing to comment on 
likely competitive effects on special access of the proposed merger 
between SBC and AT&T. Neither time nor data availability permits a full 
analysis, but in this declaration I identify some concerns that, in my 
view, the Commission and its staff should fully investigate. In 
particular I offer a preliminary economic analysis of region-wide 
merger effects in the presence of percentage-of-requirements contracts 
such as I understand SBC uses in special access.
    3. Of most direct concern is the elimination of the horizontal 
competition between SBC and AT&T where both offer facilities-based 
special access to a building or other appropriately granular geographic 
market that is not so served by several other carriers.\1\ While the 
granular geographic market definition is the most obvious, it must be 
supplemented (not replaced) by a region-wide market definition and 
analysis capable of assessing the competitive effects of such a loss of 
competition in the presence of a loyalty or volume pricing program such 
as I understand that SBC offers, linking competition in different 
granular markets. In addition, vertical concerns arise, especially 
given the Commission's pending special access rulemaking. All of these 
concerns demand much more scrutiny in the light of adequate data, which 
the Commission is well positioned to demand and analyze, and important 
parts of which SBC and AT&T are likely to be uniquely positioned to 
provide. The Commission's rulemaking does not substitute for 
competitive analysis of the proposed merger.

Special Access Market
---------------------------------------------------------------------------

    \1\ In their public interest statement, SBC and AT&T suggest 
that the markets where both offer special access are served by 
multiple others, but the specific facts they cite concern geographic 
areas far broader than buildings. A full inquiry into appropriate 
granularity is evidently needed.
---------------------------------------------------------------------------

    4. Firms such as Global Crossing build facilities over which they 
offer business customers a range of telecommunications and data 
services. In general however they do not build facilities all the way 
to customers' premises. Rather, they procure last-mile connections, 
known as special access, from ILECs such as SBC and in some cases from 
competitive access providers (CAPs), including AT&T.
    5. In its region, SBC can offer special access to essentially all 
major business premises. No CAP can offer access to a large percentage 
of such premises. However, I understand that AT&T offers special access 
connections to substantially more buildings than can any other CAP.\2\
---------------------------------------------------------------------------

    \2\ I also understand that AT&T is a major reseller of SBC 
special access. While the role of resellers in competition is not 
straightforward, it certainly need not be null, especially when 
incumbents offer volume discounts, and the Commission should 
investigate the extent to which resellers collectively, and AT&T in 
particular, may constrain SBC's effective pricing in ways that 
promote competition and consumer welfare.
---------------------------------------------------------------------------

    6. I further understand that, whatever may be the case in consumer 
markets, intermodal (wireless or cable) alternatives are not generally 
regarded as viable alternatives to special access by Global Crossing 
and similarly situated firms, nor by their customers.
    7. Unbundled network elements do not generally offer a viable, 
independently priced, alternative way for Global Crossing or its 
customers to acquire the last-mile connection, because of the FCC's 
decision not to require unbundling of network elements unless used 
primarily for local competition.\3\
---------------------------------------------------------------------------

    \3\ Unbundled Access to Network Elements: Review of the Section 
251 Unbundling Obligations of Incumbent Local Exchange Carriers, WC 
Docket 04-313, CC Docket 01-338, 2005 FCC LEXIS 912 at 64 (March 14, 
2005).
---------------------------------------------------------------------------

    8. I also understand that the Commission has treated special access 
as a market in itself.\4\
---------------------------------------------------------------------------

    \4\ See Special Access Rates for Price Cap Local Exchange 
Carriers: AT&T Corp. Petition for Rulemaking to Reform Regulation of 
Incumbent Local Exchange Carrier Rates for Interstate Special Access 
Services, 20 FCC RCD 1994 (2005); Performance Measurements and 
Standards for Interstate Special Access Services; Petition of U S 
West, Inc. For a Declaratory Ruling Preempting State Commission 
Proceedings to Regulate U S West's Provision of Federally Tariffed 
Interstate Services; Petition of Association for Local 
Telecommunications Services for Declaratory Ruling; Implementation 
of the Non-Accounting Safeguards of Sections 271 and 272 of the 
Communications Act of 1934, as amended; 2000 Biennial Regulatory 
Review--Telecommunications Service Quality Reporting Requirements; 
AT&T Corp. Petition to Establish Performance Standards, Reporting 
Requirements, and Self-Executing Remedies Need to Ensure Compliance 
by ILECs with Their Statutory Obligations Regarding Special Access 
Services, 16 FCC Rcd 20896 (2001); Local Exchange Carriers' Rates, 
Terms and Conditions for Expanded Interconnection Through Physical 
Collocation for Special Access and Switched Transport, 12 FCC Rcd 
18730 (1997).
---------------------------------------------------------------------------

    9. These considerations suggest that special access is a relevant 
antitrust product market. More subtle issues arise in geographic market 
definitions, as I discuss next.

Geographic Market Definition

Granular Analysis

    10. From the point of view of final demand-side substitution, the 
natural and correct market definition is likely to be extremely 
localized. A business located in a certain building and wishing to 
procure telecommunications services is unlikely to substitute special 
access to a different building in response to a small but significant 
and nontransitory increase in the price of special access services to 
its building. For a business with established premises, such 
substitution would involve costly relocation. Perhaps some businesses 
seeking new premises might seek out buildings to which special access 
is more competitively supplied, but it is unlikely that this effect 
would be strong enough to change the presumption that the correct 
geographic market based on demand-side substitution would be highly 
localized, as is the case with many telecommunications markets. For the 
same reason, the direct customers of special access (such as Global 
Crossing) do not find special access to different geographical points 
to be worthwhile substitutes, as they are trying to serve particular 
customers in particular locations.
    11. It is legitimate and often helpful to aggregate such highly 
granular markets when they face the same competitive conditions. But of 
course that condition can be affected by the pattern and structure of 
competitor's pricing and other competitive behavior.
    12. One natural form of competitive behavior would be for SBC and 
any CAPs who can provide special access to a particular building to 
compete, perhaps by bidding, on terms specific to that building.
    13. With that form of competition, the geographic market definition 
based on demand substitution by end users would be the correct 
framework in which to analyze the effects of a merger such as this one 
between SBC and a leading CAP.

[[Page 17211]]

    14. In that framework, one would identify geographic markets 
(buildings, for instance) in which SBC does not compete with AT&T, 
markets in which SBC faces competition only from AT&T, and markets in 
which SBC faces competition from AT&T and from one, two or more other 
CAPs. The analysis of competitive effects would then proceed separately 
for each of these classes of highly granular market.

Regional Analysis

    15. I understand that, today, SBC's pricing does not fully respond 
to such granular competitive conditions, building by building, and that 
SBC is content to price well above CAPs where it does face CAP 
competition and offers substantial discounts in return for region-wide 
commitments to give SBC not simply a large amount of business but a 
large share of the carrier's business. Thus Global Crossing reports 
that:

    ``Typically, SBC will structure volume commitments in terms of a 
percentage of the special access customer's embedded base of 
circuits, or its current annual spend. Special access customers must 
commit to spend at least 90% of their current spend in the following 
year or maintain 90% of its embedded circuit base with SBC in order 
to be eligible for volume discounts,'' \5\

and that, as a result, ``SBCV chooses not to meet its competitors' 
rates.'' \6\

    \5\ In the matter of SBC Communications Inc. and AT&T Corp. 
Applications for Transfer of Control: Comments of Global Crossing, 
at 14 (April 25, 2005).
    \6\ Id. at 17.
---------------------------------------------------------------------------

    16. Such a pricing practice links special access pricing in 
different buildings, and--while it persists--argues for a region-wide 
market definition because (as I explain below) it can make region-wide 
concentration a more important determinant of competitive behavior and 
overall pricing than concentration and entry possibilities specific to 
a building or route.
    17. This does not mean that customers can substitute across routes, 
nor that only carriers who offer special access region-wide (which 
indeed would mean only SBC) are ``in the market.'' Rather, a region-
wide geographic market definition is likely to be a sensible way of 
summarizing the competitive impact of CAP presence at multiple 
locations, as I describe in a simple formal model in the technical 
appendix below. In that model I show how the price paid by special 
access customers on SBC monopoly routes (denoted p in the model) 
depends on the percentage of routes that are SBC monopolies. The 
aggregate share of CAPs, or more precisely the share of routes served 
by CAPs in aggregate (denote [theta] in the model), turns out in that 
model to be a constraint on SBC's (discounted, i.e., effective) pricing 
p even on monopoly routes, if SBC pursues a pricing strategy of the 
kind described. It is in this sense that a region-wide geographic 
market definition is appropriate.
    18. I do not suggest that my simplified, incomplete formal model is 
the final or only answer. Rather, it illustrates that when a dominant 
firm's pricing policies link competition across routes, a simple route-
level competitive analysis, which inevitably misses such links, can 
readily yield wrong predictions for pricing, while a region-wide 
competitive analysis can help by incorporating analysis of such links.

Using Both Approaches

    19. The analysis above indicates that, to capture both the effects 
of limited potential for end-user substitution across addresses, and 
also the effects of pricing practices that link (perhaps quite widely 
separated) buildings, intelligent geographic market definition in this 
transaction involves using at least two definitions: one highly 
granular (perhaps as granular as individual office buildings), the 
other corresponding to the geographic scope of SBC's pricing practices, 
i.e., region-wide.\7\
---------------------------------------------------------------------------

    \7\ I understand that this may correspond to RBOC ``footprints'' 
such as Ameritech's not (yet) reflecting mergers into the current 
SBC.
---------------------------------------------------------------------------

    20. These are not alternative means of analysis. As always, 
definitions should not pre-empt analysis; but an analysis that uses 
geographic market definition must consider both of these definitions or 
risk overlooking important effects.
    21. Because it is at least plausible (see below) that SBC's 
reported pricing practices are exclusionary, it presumably is 
comparably plausible that the Commission's separate inquiry into the 
special access market will constrain SBC's ability to sustain those 
practices. If so, then the granular, perhaps even building-by-building 
geographic market definition would become relatively more appropriate. 
On the other hand if SBC's pricing practices survive (whether or not 
because they are benign), the region-wide geographic market definition 
remains the natural way to capture potentially important competitive 
effects. Thus a choice of one of these geographic market definitions 
would pre-judge the Commission's treatment of SBC's pricing policies. 
(As I discuss below, none of this is to suggest that the pendency of 
the Commission's special access rule-making is a reason not to consider 
the effect of this proposed merger on the special access market.) In 
this sense as well as the more substantive sense above, the two 
geographic market definitions must both be pursued at this stage, and 
are not alternatives in the sense that the Commission can simply choose 
one.
    22. SBC's pricing policies might also change as a result of changes 
in competitive conditions over time, or even as a result of a change in 
thinking by SBC's management. Thus, while it would certainly be wrong 
to analyze the merger only on a granular basis, as if SBC's actual 
current policies were off the radar screen, it would also be wrong to 
analyze the merger only on a region-wide basis, or as if those policies 
were certain to be permanent.

Competitive Effects of SBC-AT&T Merger in Special Access

Analysis With Granular Markets

    23. For many office buildings in-region, SBC is at present the only 
provider of special access. The merger would nevertheless have a 
competitive effect in those granular markets if the merger eliminates 
an important potential of entry by AT&T that is, if AT&T is an 
especially likely entrant. AT&T is a large customer of special access 
and supplier of enterprise network services, and one likely mechanism 
through which entry into special access (that is, the construction of 
special access facilities) could occur is via the customer's enterprise 
network services provider deciding to build its own facilites to bypass 
SBC's special access charges. It therefore is credible a priori that 
AT&T would be an especially likely entrant into granular special access 
markets that are currently monopolies. Such a view would be reinforced 
if (a) the majority of non-ILEC coinstruction of special access 
facilites is by an enterprise network services provider to its 
customer's premises, and (b) AT&T has a persistently high share of the 
enterprise network services market. Both of these conditions are 
consistent with my general understanding of the market, but the data 
required to examine them in detail is not publicly available; I urge 
the Commission and its staff to obtain this data and perform this 
analysis.
    24. For a substantial number of other buildings, I understand, AT&T 
and SBC are the only two alternative providers of special access. For 
businesses in such a building, or for the telecommunications carriers 
(such as Global Crossing) who compete to serve them using special 
access, this is a merger from duopoly to

[[Page 17212]]

monopoly, which should surely raise a very strong concern at the 
Commission.
    25. As usual, such concerns could be assuaged to some degree if 
entry were likely to be timely and sufficient to deter or repair any 
competitive problems. Given the large sunk costs involved, that it is 
unlikely to be the case, but Commission analysis of previous entry 
decisions by AT&T as well as by others could confirm this.
    26. There may be other buildings where SBC and AT&T both offer 
special access, and one other CAP (such as MCI) does so; \8\ as to such 
buildings, this is a ``three-to-two'' merger, which should also raise 
significant concerns.\9\
---------------------------------------------------------------------------

    \8\ There may well be other buildings where MCI provides the 
only competition to the ILEC, which will be important in analyzing a 
merger involving MCI.
    \9\ By stopping here, I do not mean to suggest that four-to-
three mergers are unproblematic, but the basic point should be clear 
by now.
---------------------------------------------------------------------------

    27. If the granular market accurately describes competition, then 
it should be possible for the Commission to quantify the likely effects 
of such changes. In particular, it would be possible (with suitable 
data from the parties) to study average special access prices with and 
without route-level competition.
    28. However, such a study will underestimate competitive effects--
perhaps drastically so--if SBC pursues a geographically averaged 
pricing policy supported by discount plans that link competitive 
conditions across different routes. In the extreme, if SBC prices 
uniformly without regard to route-level competitive conditions, but its 
overall price level is sustained above the competitive level by its 
localized monopoly power in some routes, then such a cross-section 
study would miss the effect. Rather, in that case, one must analyze 
competitive conditions across as well as within granular markets to 
understand these effects and correctly predict the competitive 
consequences of a merger, as I discuss next.

Analysis With Region-Wide Market

    29. Presumably SBC implements its discount plan in the expectation 
that it will affect customers' behavior. The effect is that a customer 
will (sometimes) pass up lower CAP prices in a particular building in 
order to meet its SBC volume commitment. That behavior, or the pricing 
plan that induces it, links competitive conditions across the separate 
buildings or other highly granular (what would otherwise be) geographic 
markets. Customer behavior then cannot be properly understood, nor 
competitive conditions examined, on a purely granular basis.
    30. In the technical appendix, I offer a simple preliminary model 
to help understand the role of CAP competition in constraining prices 
when the dominant ubiquitous firm, SBC, offers volume discounts large 
enough to be tempting, based on share commitments big enough to be 
constraining.
    31. The model assumes that SBC's discounted price is constrained by 
special access customers' ``break-out'' option of instead buying from 
CAPs wherever they offer a better price, and paying SBC's undiscounted 
price where there are no CAPs (or where SBC offers a better price on a 
granular basis, although the model predicts, consistent with what I 
understand is the evidence, that this is not the pattern).
    32. That break-out alternative is more appealing the higher is the 
gap between the percentage of buildings where there are CAPs and the 
percentage of business that a customer can give to CAPs without losing 
its SBC volume discount. As a result, the loss of a special access 
competitor through merger makes the break-out alternative less 
appealing (given SBC's volume threshold for discounts) and thus allows 
SBC to raise its discounted price without losing business.
    33. In the model, one can (recognizing that it is very preliminary) 
calculate the likely competitive effect of the loss of CAP such as 
AT&T. In the model, that effect is proportional to the change in the 
fraction of buildings that are served by one or more CAPs. That is, it 
is proportional to the fraction ([Delta][thetas] in the model) of 
buildings served, pre-merger, by SBC and AT&T alone.
    34. In this model, if one can assume that SBC's volume commitment 
requirement and its undiscounted price do not change with the merger, 
the overall average price effect from the merger is equal to that 
fraction [Delta][thetas], times the difference between SBC's 
undiscounted price and the CAP price. This appears to be about as 
strong as, or arguably stronger than, the average competitive effect of 
the merger-to-monopoly aspects of the merger would be in the granular 
mode of competition.
    35. Because the model predicts that a pricing policy like that 
attributed to SBC can create very strong competition among CAPs even at 
different locations, it may make entry incentives very weak even where 
SBC is charging prices well above cost. If so, entry would be unlikely 
to repair or deter anticompetitive effects in a timely fashion. Again, 
this is not an analysis ready for prime time: Instead, it illustrates 
why further analysis is needed.
    36. Because the model is preliminary and incomplete, and the 
necessary data is not publicly available, I view it as illustrating an 
at least initially plausible region-wide mechanism through which the 
loss of a special access competitor causes a ``unilateral effect'' 
price increase by the dominant firm, given pricing policies broadly 
akin to SBC's. This buttresses the argument that the Commission should 
carefully consider region-wide geographic markets as well as granular 
markets.

Special Access Competition, Special Access Regulation, and Leverage

    37. Whatever its legal status, any suggestion that the Commission 
should ignore competitive concerns in special access because it has a 
pending rulemaking on the topic makes no sense from a general policy or 
economic viewpoint. If the merger harms special access competition, no 
decision likely to be contemplated by the Commission in the rulemaking 
proceeding can restore such competition.
    38. To be sure, the Commission might find some policies to 
implement. But most policies would be available with or without the 
competition lost by merger, so their availability does not change that 
fact that losing competition is harmful.
    39. Furthermore, if the rulemaking proceeding might (or might be 
thought apt to) involve price regulation of special access, that will 
create (or strengthen) incentives for leverage that the merger would 
simultaneously facilitate; such regulation could even be prompted by 
the loss of special access competition due to the merger.\10\
---------------------------------------------------------------------------

    \10\ I am not suggesting (see my article cited below) that 
regulation of a bottleneck is the only condition that leads to 
incentives for leverage into an unregulated, competitive or 
potentially competitive complement. Rather, it is one well-
established condition that predictably does so.
---------------------------------------------------------------------------

    40. With greater horizontal market power in special access, and 
with a much stronger position in enterprise network services following 
its acquisition of AT&T, SBC will in any event have increased 
incentives to raise special access prices to downstream enterprise 
network service providers (or generally special access customers) such 
as Global Crossing.
    41. The effect of such a price increase, holding fixed the retail 
price charged by SBC's downstream affiliate, would be in part be to 
shift business from independent downstream providers to SBC's 
downstream affiliate; this is more likely to happen, and the 
alternative outcome of the customers dropping out of the market is less 
likely to happen, if SBC's downstream affiliate is larger and more 
attractive to customers, as will be

[[Page 17213]]

the case post-merger. Thus this component of the incentive will grow 
stronger with the merger.
    42. Another part of the effect will be simply to raise market 
prices downstream; this is likely to be the primary effect if (as I 
understand) customers face significant portability or switching costs. 
This gives SBC more profits, the larger the market share of its 
downstream affiliate. Again, this indicates that the incentive for 
price increases to independent downstream firms will grow with the 
proposed merger. This incentive must be set against the potential 
elimination of double marginalization internally.
    43. There may also be an incentive for non-price discrimination, 
especially if SBC fears that its special access pricing may be 
regulated, since that will create an incentive for regulatory bypass by 
taking rents at the enterprise network service level rather than at the 
special access level.\11\
---------------------------------------------------------------------------

    \11\ For a recent discussion of a range of leverage incentives, 
and the link with regulation of a bottleneck, see Joseph Farrell and 
Philip Weiser, ``Modularity, Vertical Integration, and Open Access 
Policies: Towards a Convergence of Antitrust and Regulation in the 
Internet Age,'' Harvard Journal of Law and Technology 17:1 (Fall 
2003), 85-135.
---------------------------------------------------------------------------

    44. Increased incentives for leverage, in turn, will lead either to 
harm to competition in downstream markets such as enterprise network 
services, or to vertical regulation to try to stop such leverage, or 
quite possibly to both.
    45. Opinions can differ on the right degree of vertical restraint 
to impose on dominant firms with incentives for leverage, and I am not 
expressing a position here on whether special access prices should be 
regulated or whether vertical regulation such as non-discrimination 
should be imposed.
    46. For the reasons above, I conclude that (a) the proposed merger 
involves a loss of direct horizontal facilities-based competition in 
special access; (b) the geographic market definition and the 
competitive analysis involve consideration of SBC's pricing policies 
for special access, and this could well lead to a region-wide (or 
similar) geographic market definition being more informative than one 
based narrowly on consumer substitution; (c) there may well also be 
vertical issues, especially if the state of competition in special 
access is problematic; and (d) the Commission should vigorously 
investigate these concerns, including demanding the data with which to 
investigate them, and a general regulatory proceeding on special access 
cannot replace the investigation of merger-specific competitive 
effects.

Technical Appendix: Pricing with Share-Contingent Discounts

    Consider the following market structure. A dominant firm, S, offers 
service at all locations. It sets a price p* and a discounted price p 
that it gives to each customer who buys at least a fraction 1-[egr] of 
its volume from it.\12\
---------------------------------------------------------------------------

    \12\ As noted above, Global Crossing reports that SBC's volume 
commitment plans specify 90% of previous-year in-region special 
access spend. In order to meet such a commitment, assuming for 
simplicity that there is no growth, the customer would have to serve 
no more than a fraction [egr] of customers via CAPs. where [egr] is 
such that (see equation above).
[GRAPHIC] [TIFF OMITTED] TN05AP06.018

    Rivals (CAPs) collectively offer service at a fraction [thetas] <1 
of all locations. They set a price [rho]c; I discuss the 
determination of [rho]c below, but for simplicity I assume 
that it is the same for all CAPs.
    Each customer needs to buy service at a number of locations, and I 
assume that service is available from CAPs (collectively) at a fraction 
[thetas] of these locations. I assume that the dominant firm's volume 
condition for the discount, that the customer buy at least a fraction 
1-[egr] of its volume from S, is binding, which means (assuming 
[rho]c <[rho]) that [egr] <[thetas].
    Thus the customer has two buying strategies. First, it could buy 
from CAPs wherever they offer service, but must then pay S the 
undiscounted price [rho]* in the fraction 1-[thetas] of case where 
there is no CAP. This ``break-out'' strategy leads to an average price 
paid of:

    [thetas][rho]c+(1-[thetas])[rho]*.

Alternatively, the customer can ``manage to the discount'' and limit 
its procurement from CAPs to a fraction [egr] <[thetas] of locations, 
so that it pays the discounted price [rho] in the remaining cases. This 
leads to an average price paid of:

    [egr][rho]c+(1-[egr])[rho].

    In reality, different customers may make different choices, but for 
a simple model, consider limit pricing by S so that all customers 
choose the latter option. (There would be no point in the discount 
program if all customers chose the former option.) At least given 
[thetas] and p*, S presumably wants to maximize p, subject to keeping 
customers on the discount program, which implies:

[GRAPHIC] [TIFF OMITTED] TN05AP06.019

Note that since the customer is offered CAP service at [thetas] 
locations but will not buy it at more than [egr] of them, CAPs at 
different locations actually compete with one another. This is a 
possible reason why, I understand, a single CAP offering special access 
to a building otherwise served only by SBC will price well below SBC, 
not just below as would presumably be the case (adjusting for quality) 
without the volume pricing.

    From the formula for p one can derive the effects on the average 
price paid if a merger removes a CAP and [thetas] thus falls, assuming 
that p* and [egr] remain unchanged: \13\ [Delta]p = -(1 - 
[egr])-1(p* - pc)[Delta][thetas]
---------------------------------------------------------------------------

    \13\ One of the ways in which this model is preliminary and 
incomplete is that it does not model SBC's choice of those 
variables.

Perhaps more usefully, we can plug the formula for p into the 
expression [egr]pc + (1 - [egr]) p for the average price p 
actually paid, yielding p = (1 - [thetas]) p* + [thetas] pc. 
This is the same average price as would be paid if (a) there were no 
linkages among locations; (b) S priced at p* at its monopoly locations; 
and (c) customers paid pc at locations with CAPs. We then 
---------------------------------------------------------------------------
have [Delta]p = (p* - pc) [-[Delta][thetas]].

    If (in the world with discount pricing) S expects that many 
customers will not break out and pay p*, but will instead manage to the 
discount and limit their purchases from CAPs so as to avoid p* and pay 
p instead, then p* plays the role of a penalty inducement to manage to 
the discount scheme as well as a market price for break-out customers 
in monopoly buildings. Thus it appears that S has an incentive to set 
p* above the monopoly level pm, roughly in proportion to the 
fraction of customers who manage to the discount rather than break out. 
On the other hand, pc reflects artificial inter-location 
competition as described above, as well as any intra-location 
competition from the presence

[[Page 17214]]

of multiple CAPs at a building, so pc will be decreasing in 
([thetas] - [egr])[sol][thetas].
    The net effect of the discount pricing program on the average price 
paid is thus not obvious from this preliminary analysis, but to the 
extent that p* > pm and/or that pc is below the 
average oligopoly price that would emerge under granular competition, 
the program apparently exacerbates the average competitive effect of a 
loss in [thetas], i.e. the average competitive effect of a merger.
    The model also seems to suggest that such a program may be 
exclusionary, in the sense of making entry even by an equally efficient 
CAP unprofitable even though the incumbent S prices well above cost. 
The gross return to entry is pc times the probability that a 
CAP will make a sale. In the simple model, that probability is 
[egr][sol][thetas] < 1. That is, despite pricing well below the 
incumbent S, a CAP will sometimes (perhaps often) lose business to S. 
Although this is not a deep or complete analysis, I believe it is 
enough to establish that the possible anticompetitive effect of such a 
pricing plan is a question well worth investigating, and that 
competitive analysis of the proposed merger should not assume with 
certainty that these pricing practices will survive the Commission's 
policy response to such an investigation.

Appendix C--Agreement

    Whereas, Quest Communications International, Inc., a Delaware 
corporation (``Qwest''), and Allegiance Telecom, Inc., a Delaware 
corporation (``Allegiance''), have entered into an Asset Purchase 
Agreement dated as of December 18, 2003 pursuant to which Qwest agreed 
to purchase substantially all of the property, assets, licenses, and 
rights that Allegiance uses to provide telecommunications services to 
business customers,
    Whereas, Qwest intends to bide for the assets of Allegiance at the 
bankruptcy auction scheduled to be held on February 12 and 13, 2004, in 
the U.S. Bankruptcy Court for the Southern District of New York,
    Whereas, the United States Department of Justice (``Department'') 
has opened a preliminary inquiry into Qwest's proposed acquisition of 
Allegiance to investigate whether Qwest's acquisition of Allegiance's 
assets used to serve telecommunications customers in five Metropolitan 
Statistical Areas--Denver, Colorado; Minneapolis, Minnesota; Portland, 
Oregon; Phoenix, Arizona; and Seattle, Washington--located largely or 
wholly within Qwest's local exchange service franchise areas (``In-
Region Assets'') may tend substantially to lessen competition in any 
relevant market,
    Whereas, the Department has identified no competitive concerns with 
Qwest's proposed acquisition of Allegiance in Metropolitan Statistical 
Areas located outside of Qwest's local exchange service franchise 
areas,
    Whereas, Allegiance is in bankruptcy and a prolonged delay in 
resolving its status could be detrimental to Allegiance's customers, 
employees, and business, as well as to competition in the 
telecommunications business,
    Whereas, Qwest and Allegiance desire that the closing of a 
potential transaction between Qwest and Allegiance not be unnecessarily 
delayed beyond April 8, 2004,
    Whereas, Qwest and Allegiance desire to reach an agreement with the 
Department prior to the bankruptcy auction regarding the Department's 
antitrust investigation and the disposition of the In-Region Assets 
should the Department conclude that Qwest's acquisition of the In-
Region may tend substantially to lessen competition, and
    Whereas, the Department believes that the undertakings of Qwest and 
Allegiance under the proposed Final Judgment would be sufficient to 
remedy any potential anticompetitive consequence of Qwest's acquisition 
of Allegiance,
    Now, therefore, Qwest, Allegiance, and the Department agree that 
the following provisions shall apply if the U.S. Bankruptcy Court for 
the Southern District of New York, pursuant to 11 U.S.C. 363, approves 
an agreement by which Qwest acquires all, or substantially all, of the 
assets of Allegiance (``the Transaction''):
    1. Qwest and Allegiance will not close the Transaction prior to 
April 8, 2004.
    2. If at any time after April 1, 2004, the Department concludes 
that Qwest's acquisition of the In-Region Assets from Allegiance may 
tend substantially to lessen competition in any relevant market, and 
the Assistant Attorney General has authorized the filing of a complaint 
in federal district court alleging the same, Qwest and Allegiance agree 
not to contest that determination or any other allegations contained in 
the Department's complaint, provided that Qwest and Allegiance shall 
have been afforded a reasonable opportunity to meet with and be heard 
by the Deputy Assistant Attorney General or Assistant Attorney General 
within the Department responsible for this matter prior to such 
determination being made.
    3. In the event that the Department determines that Qwest's 
acquisition of the in-region assets from Allegiance may tend 
substantially to lessen competition in any relevant market, Qwest and 
Allegiance hereby consent and agree, pursuant to the terms of the 
Stipulation attached hereto as Exhibit 1, to the entry of a Final 
Judgment, in the form attached hereto as Exhibit 2.
    4. The Department will conduct its investigation of Qwest's 
proposed acquisition of Allegiance via Civil Investigative Demands 
(``CIDs'') rather than Second Requests and will not oppose the closing 
of the Transaction on April 8, 2004, or any time thereafter.
    5. Qwest and Allegiance will fully comply with CIDs for documents 
and interrogatories issued by the Department, will produce the 
requested information on a rolling basis, and will use their best 
efforts to complete production by March 5, 2004. Qwest and Allegiance 
will produce any individual issued a CID for oral testimony, and will 
use their best efforts to make any such individual available within 10 
days after issuance of the CID.
    6. The Department will use its best efforts to complete its 
investigation by the later of (a) April 8, 2004, or (b) 30 days after 
Qwest and Allegiance have both fully complied with CIDs for documents 
and interrogatories issued by the Department, but in the event that the 
Department has neither closed its investigation nor filed a complaint 
as of the date the Transaction is consummated, Qwest and Allegiance 
will abide by the Hold Separate provisions contained in Paragraphs V.A-
V.L. of the Stipulation, attached hereto as Exhibit 1, until such time 
as the Department notifies Qwest and Allegiance that it has decided not 
to challenge the proposed Transaction.
    7. Until the Department competes its investigation, Qwest and 
Allegiance shall not, without the Department's consent, sell, lease, 
assign, transfer, or otherwise dispose of any of the Divestiture 
Assets, as defined in Paragraph II.D of the Proposed Final Judgment 
attached hereto as Exhibit 2, except as in the ordinary course of 
business.

William Kokasky,
Wilmer, Culter & Pickering, Attorney for Qwest

Marimichael O. Skubel,
Kirkland & Ellis LLP, Attorney for Allegiance.

Lawrence M. Frankel,
Attorney, Telecommunications & Media Section, Antitrust Division, 
United States Department of Justice.


[[Page 17215]]



United States District Court, District of Columbia

United States of America, Plaintiff, v. Qwest Communications 
International Inc. and Allegiance Telecom, Inc. Defendants.

    Civil Action No.
    Filed:

Hold Separate Stipulation and Order

    It is hereby stipulated and agreed by and between the undersigned 
parties, subject to approval and entry by the Court, that:

I. Definitions

    As used in this Hold Separate Stipulation and Order:
    A. ``Acquirer'' or ``Acquirers'' means the entity or entities to 
whom defendants divest the Divestiture Assets.
    B. ``Qwest'' means defendant Qwest Communications International 
Inc., a Delaware corporation with its headquarters in Denver, Colorado, 
its successors and assigns, and its subsidiaries, divisions, groups, 
affiliates, partnerships and joint ventures, and their directors, 
officers, managers, agents and employees.
    C. ``Allegiance'' means defendant Allegiance Telecom, Inc., a 
Delaware corporation with its headquarters in Dallas, Texas, its 
successors and assigns, and its subsidiaries, divisions, groups, 
affiliates, partnerships and joint ventures, and their directors, 
officers, managers, agents, and employees.
    D. ``Divestiture Assets'' means all assets, tangible and 
intangible, acquired by Qwest from Allegiance pursuant to 11 U.S.C. 
363, that are used by Allegiance to provide telecommunications services 
in the In-Region MSAs, except for Excluded Assets. The term 
``Divestiture Assets'' shall be construed broadly to accomplish the 
complete divestiture of assets to ensure that the divested assets are 
sufficient to operate a viable ongoing telecommunications business and 
includes, but is not limited to:
    (1) All switches, routers, transport, and associated collocation 
facilities located in the In-Region MSAs, and interconnection 
agreements used in connection with the provision of telecommunications 
services (telecommunications herein includes transmission using the IP 
protocol) to customers in the In-Region MSAs, and all interests, 
contracts and other associated rights in those facilities, that were 
acquired by Qwest from Allegiance pursuant to 11 U.S.C. 363;
    (2) All contracts with customers to provide telecommunications 
services to locations within the In-Region MSAs, business and customer 
records and information, customer lists, credit records, deposits, 
accounts, and historic and current business plans associated with the 
provision of telecommunications services to customer locations in the 
In-Region MSAs or with marketing to potential customers in the In-
Region MSAs;
    (3) All types of real property and personal property, equipment, 
inventory, office furniture, fixed assets and furnishings, supplies and 
materials located in the In-Region MSAs;
    (4) All licenses, permits and authorizations issued by the Federal 
Communications Commission or any other federal, state or local 
regulatory body used in the provision of telecommunications services in 
the In-Region MSAs;
    (5) All intellectual property rights that are used to provide 
telecommunications services in the In-Region MSAs. Intellectual 
property rights comprise all patents, licenses, sublicenses, trade 
secrets, know-how, computer software and related documentation, 
drawing, blueprints, design, technical and quality manuals, and other 
technical information defendants supply to their own employees, 
customers, suppliers, agents or licensees, or other intellectual 
property, including all intellectual property rights under third party 
licenses. Intellectual property rights will be provided to the extent 
they are capable of being transferred to a purchaser either in their 
entirety, or through a license or sub-license;
    (6) All leases, contracts, agreements, and commitments with third 
parties used primarily in connection with the provision of 
telecommunications services in the In-Region MSAs; and
    (7) All transport facilities physically located in whole or in part 
within In-Region MSAs including all interests, contracts, and 
associated rights acquired by Qwest from Allegiance pursuant to 11 
U.S.C. 363.
    E. ``Excluded Assets'' means: (a) all Excluded Customer Contracts; 
(b) all transport facilities between MSAs outside of the In-Region 
MSAs; and (c) all Shared Systems.
    F. ``Excluded Customer Contract'' means any single contract with a 
customer (a) that covers telecommunication services provided to 
locations within, as well as outside, the In-Region MSAs, (b) for which 
the majority of the services are provided outside the In-Region MSAs 
(with ``majority'' measured by an objective measure approved by the 
United States in its sole discretion), and (c) for which it would be 
impossible or impractical for Qwest and the Acquirer(s) to divide the 
revenues and responsibilities under the contract. The term also 
includes any business and customer records and information, customer 
lists, credit records, accounts, and historic and current business 
plans associated exclusively with provision of service via such 
contracts.
    G. ``In-Region MSAs'' means the following Metropolitan Statistical 
Areas (MSAs): Denver, Colorado; Minneapolis, Minnesota; Phoenix, 
Arizona; Portland, Oregon; and Seattle, Washington.
    H. ``Shared Systems'' means all operating and related systems 
acquired by Qwest from Allegiance pursuant to 11 U.S.C. 363 that (a) 
are predominantly used in connection with the provision of 
telecommunications services to customers in markets outside of the In-
Region MSAs, including, but not limited to, order entry, provisioning, 
billing, network monitoring, and other systems, and (b) are not capable 
of being divided between the divested and retained businesses.

II. Objectives

    The Final Judgment filed in this case is meant to ensure 
defendants' prompt divestiture of the Divestiture Assets for the 
purpose of remedying the effects that the United States alleges would 
otherwise result from Qwest's acquisition of the Divestiture Assets. 
This Hold Separate Stipulation and Order ensures, prior to such 
divestitures, that the Divestiture Assets remain economically viable 
and ongoing business concerns that will remain independent and 
uninfluenced by Qwest, and that competition is maintained during the 
pendency of the ordered divestitures.

III. Jurisdiction and Venue

    The Court has jurisdiction over the subject matter of this action 
and over each of the parties hereto, and venue of this action is proper 
in the United States District Court for the District of Columbia.

IV. Compliance With and Entry of Final Judgment

    A. The parties stipulate that a Final Judgment in the form attached 
hereto as Exhibit A may be filed with and entered by the Court, upon 
the motion of any party or upon the Court's own motion, at any time 
after compliance with the requirements of the Antitrust Procedures and 
Penalties Act (15 U.S.C. 16), and without further notice to any party 
or other proceedings, provided that the United States has not withdrawn 
its consent, which it may do at any time before the entry of the 
proposed Final Judgment by serving

[[Page 17216]]

notice thereof on defendants and by filing that notice with the Court.
    B. Defendants shall abide by and comply with the provisions of the 
proposed Final Judgment, pending the Judgment's entry by the Court, or 
until expiration of time for all appeals of any Court ruling declining 
entry of the proposed Final Judgment, and shall, from the date of the 
filing of this Stipulation with the Court, comply with all the terms 
and provisions of the proposed Final Judgment as though the same were 
in full force and effect as an order of the Court.
    C. Defendants shall not consummate the transaction sought to be 
enjoined by the Complaint herein before the Court has signed this Hold 
Separate Stipulation and Order.
    D. This Stipulation shall apply with equal force and effect to any 
amended proposed Final Judgment agreed upon in writing by the parties 
and submitted to the Court.
    E. In the event (1) the United States has withdrawn its consent, as 
provided in Section IV(A) above, or (2) the proposed Final Judgment is 
not entered pursuant to this Stipulation, the time has expired for all 
appeals of any Court ruling declining entry of the proposed Final 
Judgment, and the Court has not otherwise ordered continued compliance 
with the terms and provisions of the proposed Final Judgment, then the 
parties are released from all further obligations under this 
Stipulation, and the making of this Stipulation shall be without 
prejudice to any party in this or any other proceeding.
    F. Defendants represent that the divestitures ordered in the 
proposed Final Judgment can and will be made, and that defendants will 
later raise no claim of mistake, hardship or difficulty of compliance 
as grounds for asking the Court to modify any of the provisions 
contained therein.

V. Hold Separate Provisions

    Until the divestitures required by the Final Judgment have been 
accomplished:
    A. Defendants shall preserve, maintain, and continue to operate the 
Divestiture Assets as independent, ongoing, economically viable 
competitive businesses, with management, sales and operations of such 
assets held entirely separate, distinct and apart from those of Qwest's 
other operations. Qwest shall not coordinate its marketing or terms of 
sale of any products or services with those sold under any of the 
Divestiture Assets. Within ten (10) days after the entry of the Hold 
Separate Stipulation and Order, defendants will inform the United 
States of the steps defendants have taken to comply with this Hold 
Separate Stipulation and Order.
    B. Qwest shall take all steps necessary to ensure that (1) the 
Divestiture Assets will be maintained and operated as independent, 
ongoing economically viable and active competitors in the 
telecommunications business; (2) management of the Divestiture Assets 
will not be influenced by Qwest (except to the extent necessary to 
carry out Qwests's obligations under this Order or as required by 
applicable law); and (3) the books, records, competitively sensitive 
sales, marketing and pricing information, and decision-making 
concerning production, distribution or sales of products or services by 
or under any of the Divestiture Assets will be kept separate and apart 
from Qwest's other operations.
    C. Defendants shall use all reasonable efforts to maintain and 
increase the sales and revenues of the services produced or sold by the 
Divestiture Assets, and shall maintain at current or previously 
approved levels for 2005, whichever are higher, all promotional, 
advertising sales, technical assistance, marketing and merchandising 
support for Divestiture Assets.
    D. Qwest shall provide sufficient working capital and lines and 
sources of credit to continue to maintain the Divestiture Assets as 
economically viable and competitive, ongoing businesses, consistent 
with the requirements of Sections V(A) and (B).
    E. Defendants shall take all steps necessary to ensure that the 
Divestiture Assets are fully maintained in operable condition at no 
less than its current capacity and sales, and shall maintain and adhere 
to normal repair and maintenance schedule for the Divestiture Assets.
    F. Defendants shall not, except as part of a divestiture approved 
by the United States in accordance with the terms of the proposal Final 
Judgment, remove, sell, lease, assign, transfer, pledge or otherwise 
dispose of any of the Divestiture Assets.
    G. Defendants shall maintain, in accordance with sound accounting 
principles, separate accurate and complete financial ledgers, books and 
records that records that report on a periodic basis, such as the last 
business day of every month, consistent with past practices, the assets 
liabilities, expenses, revenues and income of the Divestiture Assets.
    H. Defendants shall take no action that would jeopardize, delay, or 
impede the sale of the Divestiture Assets.
    I. Defendants' employees with primary responsibility for the 
operation of the Divestiture Assets shall not be transferred or 
reassigned to other areas within the company except for transfer bids 
initiated by employees pursuant to defendants' regular, established job 
posting policy. Defendants shall provide the United States with ten 
(10) calendar days notice of such transfer.
    J. Defendants shall appoint a person or persons to oversee the 
Divestiture Assets, subject to the approval of the United States, and 
who will be responsible for defendants' compliance with this section. 
This person shall have complete managerial responsibility for the 
Divestiture Assets, subject to the provisions of this Final Judgment. 
In the event such person is unable to perform his duties, defendant 
shall appoint, subject to the approval of the United States, a 
replacement within ten (10) working days. Should defendant fail to 
appoint a replacement acceptable to the United States within this time 
period, the United States shall appoint a replacement.
    K. Unless informed otherwise by the person with managerial 
responsibility for the Divestiture Assets, Qwest shall provide the 
Divestiture Assets at no costs with the following: (a) Any services 
provided via Shared Systems, and (b) transport over interexchange 
facilities acquired by Qwest from Allegiance pursuant to 11 U.S.C. 363 
that are not included in the Divestiture Assets.
    L. Defendants shall take no action that would interfere with the 
ability of any trustee appointed pursuant to the Final Judgment to 
complete the divestiture pursuant to the Final Judgment to an Acquirer 
or Acquirers acceptable to the United States.
    M. This Hold Separate Stipulation and Order shall remain in effect 
until consummation of the divestiture required by the proposed Final 
Judgment or until further order of the Court.

    Dated:

Respectfully submitted,
For Plaintiff
United States of America

Lawrence M. Frankel,
D.C. Bar No. 441532, U.S. Department of Justice, Antitrust Division, 
1401 H Street NW., Suite 8000, Washington, DC 20530, (202) 514-4298.

For Defendant
Qwest Communications International Inc.

William Kolasky,
D.C. Bar No. 217539, Wilmer Cutler & Pickering, 2445 M Street, NW., 
Washington, DC 20037, (202) 663-6357.

For Defendant
Allegiance Telecom, Inc.


[[Page 17217]]


Marimichael O. Skubel,
D.C. Bar No. 294934, Kirkland & Ellis LLP, 655 Fifteenth Street NW,, 
Washington, DC 20005, (202) 879-5034.

    Order.
    It is so ordered by the Court, this ---- day of ------------.
-----------------------------------------------------------------------

    United States District Judge.

United States District Court District of Columbia

United States of America, Plaintiff, v. Qwest Communications 
International Inc., and Allegiance Telecom, Inc., Defendants.

    Civil Action No.
    Filed: [Date Filed]

Final Judgment

    Whereas, plaintiff, United States of America, filed its Complaint 
on April, 2004,
    Whereas, plaintiff and defendants, Qwest Communications 
International Inc. (``Qwest'') and Allegiance Telecom, Inc. 
(``Allegiance''), by their respective attorneys, have consented to the 
entry of this Final Judgment without trial or adjudication of any issue 
of fact or law, and without this Final Judgment constituting any 
evidence against or admission by any party regarding any issue of fact 
or law;
    Whereas, defendants agree to be bound by the provisions of this 
Final Judgment pending its approval by the Court;
    Whereas, the essence of this Final Judgment is the prompt and 
certain divestiture of certain rights or assets by the defendants to 
assure that competition is not substantially lessened;
    Whereas, plaintiff requires defendants to make certain divestitures 
for the purpose of remedying the loss of competition alleged in the 
Complaint; and
    Whereas, defendants have represented to the United States that the 
divestitures required below can and will be made and that defendants 
will later raise no claim of hardship or difficulty as grounds for 
asking the Court to modify and of the divestiture provisions contained 
below;
    Now therefore,. before any testimony is taken, without trial or 
adjudication of any issue of fact or law, and upon consent of the 
parties, it is Ordered, Adjudged and Decreed:

I. Jurisdiction

    This Court has jurisdiction over the subject matter of and each of 
the parties to this action. The Complaint states a claim upon which 
relief may be granted against defendants under Section 7 of the Clayton 
Act, as amended (15 U.S.C. 18).

II. Definitions

    As used in this Final Judgment:
    A. ``Acquirer'' or ``Acquirers'' means the entity or entities to 
whom defendants divest the Divestiture Assets.
    B. ``Qwest'' means defendant Qwest Communications International 
Inc., a Delaware corporation with its headquarters in Denver, Colorado, 
its successors and assigns, and its subsidiaries, divisions, groups, 
affiliates, partnerships, and joint ventures, and their director, 
officer, manages, agents, and employees.
    C. ``Allegiance'' means defendant Allegiance Telecom, Inc., a 
Delaware corporation with its headquarters in Dallas, Texas, it 
successors and assigns, and its subsidiaries, divisions, groups, 
affiliates, partnerships and joint ventures, and their directors, 
officers, managers, agents, and employees.
    D. ``Divestiture Assets'' means all assets, tangible and 
intangible, acquired by Qwest from Allegiance pursuant to 11 U.S.C. 
363, that are used by Allegiance to provide telecommunications services 
in the In-Region MSAs, except for Excluded Assets. The term 
``Divestiture Assets'' shall be construed broadly to accomplish the 
complete divestiture of assets to ensure that the divested assets are 
sufficient to operate a viable ongoing telecommunications business and 
includes, but is not limited to:
    (1) All switches, routers, transport, and associated collocation 
facilities located in the In-Region MSAs, and interconnection 
agreements used in connection with the provision of telecommunications 
services (telecommunications herein includes transmission using the IP 
protocol) to customers in the In-Region MSAs, and all interests, 
contracts and other associated rights in those facilities, that were 
acquired by Qwest from Allegiance pursuant to 11 U.S.C. 363;
    (2) All contracts with customers to provide telecommunications 
services to locations within the In-Region MSAs, business and customer 
records and information, customer lists, credit records, deposits, 
accounts, and historic and current business plans associated with the 
provision of telecommunications services to customer locations in the 
In-Region MSAs or with marketing to potential customers in the In-
Region MSAs;
    (3) All types of real property and personal property, equipment, 
inventory, office furniture, fixed assets and furnishings, supplies and 
materials located in the In-Region MSAs;
    (4) All licenses, permits and authorizations issued by the Federal 
Communications Commission or any other federal, state or local 
regulatory body used in the provision of telecommunications services in 
the In-Region MSAs;
    (5) All intellectual property rights that are used to provide 
telecommunications services in the In-Region MSAs. Intellectual 
property rights comprise all patents, licenses, sublicenses, trade 
secrets, know-how, computer software and related documentation, 
drawing, blueprints, design, technical and quality manuals, and other 
technical information defendants supply to their own employees, 
customers, suppliers, agents or licensees, or other intellectual 
property, including all intellectual property rights under third party 
licenses. Intellectual property rights will be provided to the extent 
they are capable of being transferred to a purchaser either in their 
entirety, or through a license or sub-license;
    (6) All leases, contracts, agreements, and commitments with third 
parties used primarily in connection with the provision of 
telecommunications services in the In-Region MSAs; and
    (7) All transport facilities physically located in whole or in part 
within In-Region MSAs including all interests, contracts, and 
associated rights acquired by Qwest from Allegiance pursuant to 11 
U.S.C. 363.
    E. ``Excluded Assets'' means: (a) all Excluded Customer Contracts; 
(b) all transport facilities between MSAs outside of the In-Region 
MSAs; and (c) all Shared Systems.
    F. ``Excluded Customer Contract'' means any single contract with a 
customer (a) that covers telecommunications services provided to 
locations within, as well as outside, the In-Region MSAs, (b) for which 
the majority of the services are provided outside of the In-Region MSAs 
(with ``majority'' measured by an objective measure approved by the 
United States in its sole discretion), and (c) for which it would be 
impossible or impractical for Qwest and the Acquirer(s) to divide the 
revenues and responsibilities under the contract. The term also 
includes any business and customer records and information, customer 
lists, credit records, and accounts, and historic and current business 
plans associated exclusively with provision of service via such 
contracts.
    G. ``In-Region MSAs'' means the following Metropolitan Statistical 
Areas (MSAs): Denver, Colorado; Minneapolis, Minnesota; Phoenix, 
Arizona; Portland, Oregon; and Seattle, Washington.

[[Page 17218]]

    H. ``Shared Systems'' means all operating and related systems 
acquired by Qwest from Allegiance pursuant to 11 U.S.C. 363 that (a) 
are predominantly used in connection with the provision of 
telecommunications services to customers in markets outside of the In-
Region MSAs, including, but not limited to, order entry, provisioning, 
billing, network monitoring, and other systems, and (b) are not capable 
of being divided between the divested and retained businesses.

III. Applicability

    A. This Final Judgment applies to Qwest and Allegiance, as defined 
above, and all other persons in active concert or participation with 
any of them who receive actual notice of this Final Judgment by 
personal service or otherwise.
    B. Defendants shall require, as a condition of the sale or other 
disposition of all or substantially all of their assets or of lesser 
business units that include the Divestiture Assets, that the purchaser 
of those assets agrees to be bound by the provision of this Final 
Judgment, provided, however, that defendants need not obtain such an 
agreement from the Acquirer(s).

IV. Divestitures

    A. Defendants are ordered and directed, within 75 calendar days 
after the filing of the Complaint in this matter, or five (5) days 
after notice of the entry of this Final Judgment by the Court, 
whichever is later, to divest the Divestiture Assets in a manner 
consistent with this Final Judgment to an acquirer acceptable to the 
United States in its sole discretion. The United States, in its sole 
discretion, may agree to an extension of this time period of up to 
three thirty-day periods, not to exceed ninety (90) calendar days in 
total, and shall notify the Court in such circumstances. Defendants 
agree to use their best efforts to divest the Divestiture Assets as 
expeditiously as possible.
    B. In accomplishing the divestiture ordered by this Final Judgment, 
defendants promptly shall make known, by usual and customary means, the 
availability of the Divestiture Assets. Defendants shall inform any 
person making inquiry regarding a possible purchase of the Divestiture 
Assets that they are being divested pursuant to this Final Judgment and 
provide that person with a copy of this Final Judgment. Defendants 
shall offer to furnish to all prospective Acquirers, subject to 
customary confidentiality assurances, all information and documents 
relating to the Divestiture Assets customarily provided in a due 
diligence process except such information or documents subject to the 
attorney-client or work-product privileges. Defendants shall make 
available such information to the United States at the same time that 
such information is made available to any other person.
    C. Defendants shall provide the Acquirer(s) and the United States 
information relating to the personnel involved in the production, 
operation, development and sale of the Divestiture Assets to enable the 
Acquirer(s) to make offers of employment. Defendants will not interfere 
with any negotiations by the Acquirer(s) to employ any defendant 
employee whose primary responsibility is the production, operation, 
development and sale of the Divestiture Assets.
    D. Defendants shall permit prospective Acquirer(s) of the 
Divestiture Assets to have reasonable access to personnel and to make 
inspections of the physical facilities of the business to be divested; 
access to any and all environmental, zoning, and other permit documents 
and information; and access to any and all financial, operational, or 
other documents and information customarily provided as part of a due 
diligence process.
    E. Defendants shall warrant to all Acquirers of the Divestiture 
Assets that each asset will be operational on the date of sale.
    F. Defendants shall not take any action that will impede in any way 
the obtaining of necessary regulatory approvals, or operation or 
divestiture of the Divestiture Assets.
    G. Defendants shall warrant to the Acquirer(s) of the Divestiture 
Assets that there are no material defects in the environmental, zoning, 
licenses or other permits pertaining to the operation of each asset, 
and that following the sale of the Divestiture Assets, defendants will 
not undertake, directly or indirectly, any challenges to the 
environmental, zoning, licenses or other permits relating to the 
operation of the Divestiture Assets.
    H. Unless the United States otherwise consents in writing, the 
divestiture pursuant to Section IV, or by trustee appointed pursuant to 
Section V, of this Final Judgment, shall include the entire Divestiture 
Assets, and shall be accomplished in such a way as to satisfy the 
United States, in its sole discretion, that the Divestiture Assets can 
and will be used by the Acquirer(s) as part of a viable, ongoing 
telecommunications business. Divestiture of the Divestiture Assets may 
be made to one or more Acquirers, provided that in each instance it is 
demonstrated to the sole satisfaction of the United States that the 
Divestiture Assets will remain viable and the divestiture of such 
assets will remedy the competitive harm alleged in the Complaint. The 
divestitures, whether pursuant to Section IV or Section V of this Final 
Judgment,

    (1) Shall be made to an Acquirer (or Acquirers) that, in the 
United States's sole judgment, has the intent and capability 
(including the necessary managerial, operational, technical and 
financial capability) of competing effectively in the business of 
telecommunications services; and
    (2) Shall be accomplished so as to satisfy the United States, in 
its sole discretion, that none of the terms of any agreement between 
an Acquirer (or Acquirers) and defendants give defendants the 
ability unreasonably to raise the Acquirer's costs, to lower the 
Acquirer's efficiency, or otherwise to interfere in the ability of 
the Acquirer to compete effectively.

    I. Upon the Acquirer(s)'s request and upon commercially reasonable 
terms and conditions, Qwest will, for a reasonable transitional period 
following divestiture, provide Acquirer(s) with (a) any services 
provided via Shared Systems; and (b) any interexchange services or 
transport over interexchange facilities acquired by Qwest from 
Allegiance pursuant to 11 U.S.C. 363 that are not included in the 
Divestiture Assets.
    J. To the extent leases, contracts, agreements, intellectual 
property rights, licenses or commitments with third parties that are 
acquired by Qwest from Allegiance pursuant to 11 U.S.C. 363 and would 
otherwise be Divestiture Assets are not assignable or transferable, or 
such contracts (except for customer contracts), agreements, rights, 
licenses or commitments cover more than one MSA, including at least one 
MSA that is not an In-Region MSA, then Qwest is not obligated to assign 
or transfer such contracts, agreements, rights, licenses or 
commitments. In that event, or in the event that Qwest rejects any 
executory contract pursuant to 11 U.S.C. 365 which the Acquirer deems 
necessary to operate a viable ongoing telecommunications business in 
the In-Region MSAs, Qwest shall use its best efforts to obtain for the 
Acquirer the equivalent of the services or other rights that would have 
been provided but for said non-assignment, non-transfer, or rejection.

V. Appointment of Trustee

    A. If defendants have not divested the Divestiture Assets within 
the time period specified in Section IV(A), defendants shall notify the 
United States of that fact in writing. Upon application of the United 
States, the

[[Page 17219]]

Court shall appoint a trustee selected by the United States and 
approved by the Court to effect the divestiture of the Divestiture 
Assets.
    B. After the appointment of a trustee becomes effective, only the 
trustee shall have the right to sell the Divestiture Assets. The 
trustee shall have the power and authority to accomplish the 
divestiture to an Acquirer[s] acceptable to the United States at such 
price and on such terms as are then obtainable upon reasonable effort 
by the trustee, subject to the provisions of Sections IV, V, and VI of 
this Final Judgment, and shall have such other powers as this Court 
deems appropriate. Subject to Section V(D) of this Final Judgment, the 
trustee may hire at the cost and expense of defendants any investment 
bankers, attorneys, or other agents, who shall be solely accountable to 
the trustee, reasonably necessary in the trustee's judgment to assist 
in the divestiture.
    C. Defendants shall not object to a sale by the trustee on any 
ground other than the trustee's malfeasance. Any such objections by 
defendants must be conveyed in writing to the United States and the 
trustee within ten (10) calendar days after the trustee has provided 
the notice required under Section VI.
    D. The trustee shall serve at the cost and expense of Qwest, on 
such terms and conditions as the United States approves, and shall 
account for all monies derived from the sale of the assets sold by the 
trustee and all costs expenses so incurred. After approval by the Court 
of the trustee's accounting, including fees for its services and those 
of any professionals and agents retained by the trustee, all remaining 
money shall be paid to Qwest and the trust shall then be terminated. 
The compensation of the trustee and any professionals and agents 
retained by the trustee shall be reasonable in light of the value of 
the Divestiture Assets and based on a fee arrangement providing the 
trustee with an incentive based on the price and terms of the 
divestiture and the speed with which it is accomplished, but timeliness 
is paramount.
    E. Defendants shall use their best efforts to assist the trustee in 
accomplishing the required divestiture. The trustee and any 
consultants, accountants, attorneys, and other persons retained by the 
trustee shall have full and complete access to the personnel, books, 
records, and facilities of the business to be divested, and defendants 
shall develop financial and other information relevant to such business 
as the trustee may reasonably request, subject to reasonable protection 
for trade secret or other confidential research, development, or 
commercial information. Defendants shall take no action to interfere 
with or to impede the trustee's accomplishment of the divestiture.
    F. After its appointment, the trustee shall file monthly reports 
with the United States and the Court setting forth the trustee's 
efforts to accomplish the divestiture ordered under this Final 
Judgment. To the extent such reports contain information that the 
trustee deems confidential, such reports shall not be filed in the 
public docket of the Court. Such reports shall include the name, 
address, and telephone number of each person who, during the preceding 
month, made an offer to acquire, expressed an interest in acquiring, 
entered into negotiations to acquire, or was contacted or made an 
inquiry about acquiring, any interest in the Divestiture Assets, and 
shall describe in detail each contact with any such person. The trustee 
shall maintain full records of all efforts made to the Divestiture 
Assets.
    G. If the trustee has not accomplished such divestiture within six 
months after its appointment, the trustee shall promptly file with the 
Court a report setting forth (1) the trustee's efforts to accomplish 
the required divestiture, (2) the reasons, in the trustee's judgment, 
why the required divestiture has not been accomplished, and (3) the 
trustee's recommendations. To the extent such reports contain 
information that the trustee deems confidential, such reports shall not 
be filed in the public docket of the Court. The trustee shall at the 
same time furnish such report to the United States who shall have the 
right to make additional recommendations consistent with the purpose of 
the trust. The Court thereafter shall enter such orders as it shall 
deem appropriate to carry out the purpose of the Final Judgment, which 
may, if necessary, include extending the trust and the term of the 
trustee's appointment by a period requested by the United States.

VI. Notice of Proposed Divestiture

    A. Within two (2) business days following execution of a definitive 
divestiture agreement, defendants or the trustee, whichever is then 
responsible for effecting the divestiture required herein, shall notify 
the United States of any proposed divestiture required by Section IV or 
V of this Final Judgment. If the trustee is responsible, it shall 
similarly notify defendants. The notice shall set forth the details of 
the proposed divestiture and list the name, address, and telephone 
number of each person not previously identified who offered or 
expressed an interest in or desire to acquire any ownership interest in 
the Divestiture Assets, together with full details of the same.
    B. Within fifteen (15) calendar days of receipt by the United 
States of such notice, the United States may request from defendants, 
the proposed Acquirer or Acquirers, and other third party, or the 
trustee if applicable additional information concerning the proposed 
divestiture, the proposed Acquirer or Acquirers, and any other 
potential Acquirer. Defendants and the trustee shall furnish any 
additional information requested within fifteen (15) calendar days of 
the receipt of the request, unless the parties shall otherwise agree.
    C. Within thirty (30) calendar days after receipt of the notice or 
within twenty (20) calendar days after the United States has been 
provided the additional information requested from defendants, the 
proposed Acquirer or Acquirers, any third party, and the trustee, 
whichever is later, the United States shall provide written notice to 
defendants and the trustee, if there is one, stating whether or not it 
objects to the proposed divestiture. If the United States provides 
written notice that it does not object, the divestiture may be 
consummated, subject only to defendants' limited right to object to the 
sale under Section V(C) of this Final Judgment. Absent written notice 
that the United States does not object to the proposed Acquirer or upon 
objection by the United States, a divestiture proposed under Section IV 
or Section V shall not be consummated. Upon objection by defendants 
under Section V(C), a divestiture proposed under Section V shall not be 
consummated unless approved by the Court.

VII. Financing

    Defendants shall not finance all or any part of any purchase made 
pursuant to Section IV or V of this Final Judgment.

VIII. Hold Separate

    Until the divestiture required by this Final Judgment has been 
accomplished defendants shall take all steps necessary to comply with 
the Hold Separate Stipulation and Order entered by this Court. 
Defendants shall take no action that would jeopardize the divestiture 
ordered by this Court.

IX Affidavits

    A. Within twenty (20) calendar days of the filing of the Complaint 
in this matter, and every thirty (30) calendar days thereafter until 
the divestiture[s] has been completed under Section IV or V, defendants 
shall deliver to the United States an affidavit as to the fact and 
manner of its compliance with Section

[[Page 17220]]

IV or V of this Final Judgment. Each such affidavit shall include the 
name, address, and telephone number of each person who, during the 
preceding thirty days, made an offer to acquire, expressed an interest 
in acquiring, entered into negotiations to acquire, or was contacted or 
made an inquiry about acquiring, any interest in the Divestiture 
Assets, and shall describe in detail each contact with any such person 
during that period. Each such affidavit shall also include a 
description of the efforts defendants have taken to solicit buyers for 
the Divestiture Assets, and to provide required information to 
prospective purchasers, including the limitations, if any, on such 
information. Assuming the information set forth in the affidavit is 
true and complete, any objection by the United States to information 
provided by defendants, including limitation on information, shall be 
made within fourteen (14) days of receipt of such affidavit.
    B. Within twenty (20) calendar days of the filing of the Complaint 
in this matter, defendants shall deliver to the United States an 
affidavit that describes in reasonable detail all actions defendants 
have taken and all steps defendants have implemented on an ongoing 
basis to comply with Section VIII of this Final Judgment. Defendants 
shall deliver to the United States an affidavit describing any changes 
to the efforts and actions outlined in defendants' earlier affidavits 
filed pursuant to this section within fifteen (15) calendar days after 
the change is implemented.
    C. Defendants shall keep all records of all efforts made to 
preserve and divest the Divestiture Assets until one year after such 
divestiture has been completed.

X. Compliance Inspection

    A. For the purposes of determining or securing compliance with this 
Final Judgment, or of determining whether the Final Judgment should be 
modified or vacated, and subject to any legally recognized privilege, 
from time to time duly authorized representatives of the United States 
Department of Justice, including consultants and other persons retained 
by the United States, shall, upon written request of a duly authorized 
representative of the Assistant Attorney General in charge of the 
Antitrust Division, and on reasonable notice to defendants, be 
permitted:
    (1) Access during defendants' office hours to inspect and copy, or 
at the United States's option, to require defendants provide copies of, 
all books, ledgers, accounts, records and documents in the possession, 
custody, or control of defendants, relating to any matters contained in 
this Final Judgment; and
    (2) To interview, either informally or on the record, defendants' 
officers, employees, or agents, who may have their individual counsel 
present, regarding such matters. The interviews shall be subject to the 
reasonable convenience of the interviewee and without restraint or 
interference by defendants.
    B. Upon the written requests of a duly authorized representative of 
the Assistant Attorney General in charge of the Antitrust Division, 
defendants shall submit written reports or interrogatory responses, 
under oath if requested, relating to any of the matters contained in 
this Final Judgment as may be requested.
    C. No information or documents obtained by the means provided in 
this section shall be divulged by the United States to any person other 
than an authorized representative of the executive branch of the United 
States, except in the course of legal proceedings to which the United 
States is a party (including grand jury proceedings), or for the 
purpose of securing compliance with this Final Judgment, or as 
otherwise required by law.
    D. If at the time information or documents are furnished by 
defendants to the United States, defendants represent and identifying 
in writing the material in any such information or documents to which a 
claim of protection may be asserted under Rule 26(c)(7) of the Federal 
Rules of Civil Procedure, and defendants mark each pertinent page of 
such material, ``Subject to claim of protection under Rule 26(c)(7) of 
the Federal Rules of Civil Procedure,'' then the United States shall 
give defendants ten (10) calendar days notice prior to divulging such 
material in any legal proceeding (other than a grand jury proceeding).

XI. No Reacquisition

    Defendants may not reacquire any part of the Divestiture Assets 
during the term of this Final Judgment.

XII. Retention of Jurisdiction

    This Court retains jurisdiction to enable any party to this Final 
Judgment to apply to this Court at any time for further orders and 
directions as may be necessary or appropriate to carry out or construe 
this Final Judgment, to modify any of its provisions, to enforce 
compliance, and to punish violations of its provisions.

XIII. Expiration of Final Judgment

    Unless this Court grants an extension, this Final Judgment shall 
expire ten years from the date of its entry.

XVI. Public Interest Determination

    Entry of this Final Judgment is in the public interest.

    Date: --------------

    Court approval subject to procedures of Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16.

-----------------------------------------------------------------------
United States District Judge.

Appendix D--Reply Declaration of Joseph Farrell

Before the Federal Communications Commission

In the Matter of Special Access Rates for Price Cap Local Exchange 
Carriers

[WC Docket No. 05-25]

AT&T Corp. Petition for Rulemaking to Reform Regulation of Incumbent 
Local Exchange Carrier Rates for Interstate Special Access Services

[RM No. 10593]

Reply Declaration of Joseph Farrell on Behalf of CompTel

I. Qualifications

    1. I am Professor of Economics, Affiliate Professor of Business, 
and Chair of the Competition Policy Center at the University of 
California at Berkeley. Among other non-university professional 
activities, I was Chief Economist at the FCC in 1996-1997, President of 
the Industrial Organization Society in 1996, Editor of the Journal of 
Industrial Economics in 1995-2000, Deputy Assistant Attorney General 
and chief economist at the Antitrust Division of the U.S. Department of 
Justice in 2000-2001, and member of the National Academies of Science, 
Computer Science and Telecommunications Board in 2001-2004. I am a 
Fellow of the Econometric Society and a member of the Editorial Board 
of the journal Information Economics and Policy.

II. Overview

    2. I begin by explaining why incumbent termination charges and 
certain kinds of optional volume or loyalty discounts are likely to 
exacerbate problems arising from well-known barriers to entry, 
especially when the inducement for customers to subscribe to these 
optional plans includes raising the price of the alternative, e.g., 
setting excessive basic rates for month-to-month service. I then 
discuss the use of price and cost

[[Page 17221]]

information for assessing competition in this market, and comment in 
particular on the Declaration of Dr. William Taylor.

III. Effects of ILEC Contracts on Competition

    3. Economic and structural barriers to competitive entry into the 
special access market are well known and well documented. Ordover and 
Willig summarized several such barriers in a declaration submitted 
along with AT&T's petition that launched this proceeding.\1\ Special 
access services are characterized by economies of scale and sunk costs, 
as well as substantial incumbent first-mover advantages such as rights-
of-way and building access. As a result, competitive entry generally 
has been restricted to the highest capacity services provided in dense 
metropolitan areas. Any further impediments to entry, such as the ILEC 
contract provisions I describe below, exacerbate these inherent 
economic and operational barriers.
---------------------------------------------------------------------------

    \1\ In the Matter of AT&T Corp. Petition for Rulemaking To 
Reform Regulation of Incumbent Local Exchange Carrier Rates for 
Interstate Special Access Services, RM No. 10593. Declaration of 
Janusz A. Ordover and Robert D. Willig in support of AT&T's 
Petition, at ] 38-45.
---------------------------------------------------------------------------

    4. Among such incremental impediments to entry would be (a) 
excessive charges (typically payable by the customer) for terminating 
ILEC service, (b) commitments to purchase some minimum amount from the 
incumbent, with substantial penalties for non-compliance, and (c) any 
provisions such as volume or loyalty discounts under which a special 
access consumer pays the ILEC more for something else (such as service 
at another location) if it uses an entrant rather than ILEC special 
access in one location. For many customers on a discount plan, the 
basic month-to-month tariff may be the next-most preferred alternative. 
When the basic month-to-month plan specifies prices significantly above 
the competitive level, these discounted prices (and discounted prices 
in other plans) can also be above competitive levels. Moreover, when a 
monopoly offers proportional or relative discounts off its undiscounted 
prices in order to induce customers to agree to exclusionary 
provisions, it has an incentive to set the undiscounted price above 
even the monopoly level (because, rather than simply deterring demand, 
an increase above the monopoly level steers customers into the discount 
plans and also brings the discount prices closer to the monopoly 
level).\2\ Thus, even if they have other efficiency rationales, such 
pricing schemes put an additional wedge into the incentive for the 
customer to contract with a competitive carrier whose long-run cost is 
below the ILEC's price.\3\ They thus weaken entry as a constraint on an 
incumbent's overall price level, whether or not they fall into standard 
antitrust categories such as predatory pricing or tying.
---------------------------------------------------------------------------

    \2\ The economics of price-setting once a subset of customers 
become entitled to a percentage discount off a list price are 
analyzed by Borenstein, Severin, 1996. ``Settling for Coupons: 
Discount Contracts as Compensation and Punishment in Antitrust 
Lawsuits,'' Journal of Law & Economics, University of Chicago Press, 
vol. 39(2), pages 379-404. Professor Borenstein shows that such 
discounts do not lower prices overall but rather implement a 
transfer from non-discount customers to discount customers, with 
almost no effect on average price or on the seller's profit. 
Moreover, if entitlement to the discount is based on agreeing to 
exclusionary terms, such arrangements further harm consumers in the 
long run. In price flex areas, even basic tariffs are unregulated, 
and the rates in these tariffs can be, and have been, increased by 
the ILEC.
    \3\ The basic economics here were explored in the well-known 
article by Aghion, Philippe and Bolton, Patrick. ``Contracts as a 
Barrier to Entry,'' American Economic Review, June 1987, 77(3), pp. 
388-401. See also Joseph Farrell, ``Deconstructing Chicago on 
Exclusive Dealing,'' Antitrust Bulletin, forthcoming, available at 
http://repositories.cdlib.org/iber/cpc/CPC05-053/. In particular, I 
explain there why discounts to customers in return for signing 
exclusive or exclusionary contracts may not make the customers 
better off.
---------------------------------------------------------------------------

    5. ILECs have implemented such pricing schemes in their special 
access tariffs. SBC's ``Managed Value Plan'' (``MVP'') Tariff is an 
example. The MVP is an umbrella plan. Customers purchasing a wide range 
of special access products can include several such purchases in the 
MVP, which provides discounts in addition to term and volume discounts 
contained in their underlying tariffs from which customers purchase the 
special access circuits that they include in the MVP. The MVP discounts 
increase each year (9% in the 1st year, 11% in the 2nd, 12% in the 3rd, 
13% in the 4th, and 14% in the 5th year). Carriers must spend at least 
$10 million annually on SBC special access services to be eligible.\4\ 
The MVP establishes a ``Minimum Annual Revenue Commitment'' (MARC) that 
the carrier must maintain with SBC for the five-year term. The MARC is 
established when the carrier joins the MVP by taking a carrier's 
previous three months' billing for qualified services (defined as 
virtually all SBC transport services) multiplied by four.
---------------------------------------------------------------------------

    \4\ If the customer has a national footprint, it must meet the 
$10 million minimum in each SBC region.
---------------------------------------------------------------------------

    6. Carriers receive the MVP discount on services purchased up to 
their MARC. The discount does not apply to services purchased in excess 
of the MARC unless the MARC is increased. The MARC can be increased 
(semi-annually, by a minimum of 5%), but cannot be decreased during the 
term of the MVP.
    7. The MVP requires carriers to purchase at least 95% of their SBC 
transport services from SBC's interstate tariff, restricting their 
purchases of UNEs to less than 5%. (Recent tariff contract filings 
include a higher requirement of 98%).\5\
---------------------------------------------------------------------------

    \5\ See e.g.. SWBT Tariff FCC No. 73, Section 41.31.
---------------------------------------------------------------------------

    8. If a carrier fails to meet the MARC, it must either continue the 
contract and pay a shortfall penalty equal to the difference between 
its MARC and the actual amount spent, or terminate its contract and pay 
a termination penalty. For example, if the carrier terminates during 
year 3 of the plan, it pays 12.5% of the MARC for the remainder of year 
3 and the remaining years of the agreement. The customer is also billed 
for any nonrecurring charges that were waived under the MVP agreement.
    9. The termination penalty requires repayment of all MVP discounts 
received in the six months preceding the termination date plus a 
specified percentage of the MARC for the remainder of the term (10% if 
in year 1 or year 5, otherwise 12.5%). The table below lays out the 
termination penalties for a carrier with a MARC of $20 million that 
terminates its agreement at the beginning of a year. The table assumes 
that a discount was earned in each of the previous 6 months.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Discount
                                                            Current MVP      earned in      Percent of       Remaining                     Penalty  (in
            Year in which termination occurs               discount rate    previous 8       Remaining    commitment due  Total  penalty      months)
                                                             (percent)        months      commitment due
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................               9              $0            10.0     $10,000,000     $10,000,000             6.0
2.......................................................              11         900,000            12.5      10,000,000      10,900,000             6.5
3.......................................................              12       1,100,000            12.5       7,500,000       8,600,000            5.27
4.......................................................              13       1,200,000            12.5       5,000,000       6,200,000             3.7

[[Page 17222]]

 
5.......................................................              14       1,300,000            10.0       2,000,000      3,3000,000             2.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    10. The Remaining Commitment Due is calculsted as the MARC over the 
remaining years of the contract times the penalty rate (labeled ``% of 
Remaining Commitment Due''). The total penalty is the sum of the 
Remaining Commitment Due and any discount earned in the previous 6 
months. In the first two years of the contract, the penalty amounts to 
more than 50% of the annual MARC. In the last year, it falls to about 
15% of the annual MARC. In addition to this penalty, the customer may 
incur termination penalties specified in the underlying tariff for the 
services included in the MVP. In some cases, these penalties amount to 
40% of the monthly recurring rate over the remaining term of the 
tariff.\6\
---------------------------------------------------------------------------

    \6\ Southwestern Bell Telephone Company, Tarffic F.C.C., No. 72, 
2nd Revised Page 7-68.3.5.
---------------------------------------------------------------------------

    11. The MVP is structured in a way that can make it unprofitable 
for a competitor to win any modest portion of a customer's business, 
even if the incumbent's price exceeds the competitor's long-run cost. 
Essentially, it sets up an automatic and sometimes drastic price cut 
for any portion of the customer's business that the customer is 
considering switching to a competitor. For example, consider a customer 
that spends $20 million on special access services supplied by SBC. The 
customer can either (1) sign the MVP contract and purchase $20 million 
in special access services from SBC or (2) purchase 20% of its services 
from a CLEC and 80% from SBC. In scenario (1), the carrier receives an 
average of 11.8% discount (ignoring discounting) from SBC over the 
length of the contract,\7\ thus its total expenditure is $17.64 million 
per year. In scenario (2), the carrier would not be able to enter into 
an MVP agreement because the MARC is based on 100% of historical 
revenues. Thus, for the 80%of its special access requirements that it 
purchased from SBC, the customer would spend $16 million. The carrier 
would save money in this scenario only if the competitive carrier 
charged less than $1.64 million for the remaining 20% of the customer's 
demand, a discount of 59% off SBC's $4 million price before MVP 
discounts.
---------------------------------------------------------------------------

    \7\ The 11.8% average discount is the arithmetic mean of the 
discounts of 9%, 11% 12%, 13% and 14%, offered in each of the five 
years of SBC's MVP.
---------------------------------------------------------------------------

    12. Once a MVP agreement is signed, the marginal price of special 
access services for special access spending up to the MARC is zero, 
because a customer that misses the MARC is required to make up the 
shortfall by paying a penalty. The marginal price if the total spending 
is above the MARC is SBC's rate before the MVP discount is deducted 
(unless the MARC is increased). Because the MARC cannot be decreased, a 
customer whose demand does not grow cannot switch to a competitive 
carrier for part or all of its special access spending without 
incurring significant penalties.
    13. A customer with increasing expenditures on special access may 
find it economical to use a competitor to serve its new demand. 
Consider the example of a customer that entered into an MVP agreement 
with a MARC of $20 million. Suppose that the customer established 
business in a new area, requiring special access services worth $10 
million in that area. The carrier could either include this new demand 
for special access service in its MARC, increasing the MARC by $10 
million, and then receive the 11.8% average discount on this new 
commitment; or else it could go to a competitor that would only need to 
offer the 11.8% discount off SBC's pre-MVP prices to match the discount 
offered by the MVP plan.
    14. However, if this $10 million in new growth in the network 
occurs at the same time as a reduction of $2 million in the customer's 
original footprint, then the situation changes. In this case, the first 
$2 million of the new growth would cost the customer nothing if it used 
SBC, since the customer had a commitment to spend $20 million on SBC's 
special access services. If all the new business went to SBC, the MARC 
could be increased to $28 million and the discounted payment would be 
$24.696 million. If the customer wanted to use a non-ILEC provider for 
the entire $10 million of new growth business, it would still have to 
maintain the $20 million MARC commitment and, with $18 million spent on 
special access purchased from SBC, it would not receive any MVP 
discount. Thus, it would pay $20 million to SBC. Using the non-ILEC 
provider would be lower cost only if its total price for the new growth 
was less than $4.7 million, a 53% discount off SBC's (pre-MVP) prices 
of $10 million. In other words, the rival must beat a price that is 
less than half of the ILEC's pre-MVP price.
    15. Thus in some circumstances a customer switching a part of its 
business to a non-ILEC provider could lose not only the discount on the 
portion switched, but also the MVP discount on the portion that 
remained with the ILEC. When the competitor cannot win the entire 
business (if, for example, it has loops to some but not all of the 
customer's locations), it is effectively foreclosed from serving that 
customer.
    16. As a result, the MVP and similar pricing plans can have the 
effect of requiring a competitive carrier to beat a marginal price that 
is well below the average price that special access customers pay the 
ILEC. That is, the ILEC can charge a price (11.8% below its pre-MVP 
price) that is well above a competitive carrier's cost, and the 
competitor will nevertheless find it unprofitable to enter on a small 
scale, because the customer is penalized on its inframarginal SBC 
business for giving marginal business to the competitor.\8\
    17. The effects of the MVP are magnified when the underlying 
tariffs for the special access services purchased by a customer contain 
similar discounts and penalties. To illustrate, consider Southwestern 
Bell Telephone Company's DS1 Term Payment Plan (DS1 TPP).\9\ The base 
payment in the TPP is circuit-specific--it requires commitments to 
specific circuits for the term of the contract. But competing carriers 
often have a considerable amount of customer churn. For such customers, 
SBC offers an option (the DS1 High Capacity Service Portability 
Commitment) that waives the specific

[[Page 17223]]

circuit termination penalties described above, allowing customers to 
add and remove circuits without penalty. Instead of circuit-specific 
commitments, the customer commits to a level of DS1 channel 
terminations. The Portability Commitment lasts for three years. The 
commitment level is 100% of the total DS1 channel terminations in 
service in the month preceding the start of the agreement. This 
includes DS1 under term commitments and month-to-month arrangements.
---------------------------------------------------------------------------

    \8\ Like many exclusionary strategies, this can be defeated if 
entrants can realistically enter on a large scale and serve all (or 
a sufficient set of) customers. Thus it is exclusionary only if that 
is unrealistic. It is my understanding that after years of 
policymakers encouraging CLEC entry, CLECs still directly address 
only a very limited set of buildings. See Review of the Section 251 
Unbundling Obligations of Incumbent Local Exchange Carriers, CC 
Docket No. 01-338, Report and Order and Order on Remand and Further 
Notice of Proposed Rulemaking, 18 FCC Rcd. 16978, 17155, n.856 
(2003). (``Both competitive LECs and incumbent LECs report that 
approximately 30,000, i.e., between 3% and 5% of the nation's 
commercial office buildings, are served by competitor-owned fiber 
loops.'').
    \9\ Tariff F.C.C. No. 73, Section 7.2.
---------------------------------------------------------------------------

    18. Each month, the total number of 2, 3, 5, and 7 year DS1 TPP 
Channel Terminations for the previous month will be calculated and 
measured against the commitment level. If this total is less than 80% 
of the commitment level, then the customer is billed a shortfall 
penalty equal to the difference between 80% of the CL and the actual 
number purchased times the non-recurring charge. If this total is more 
than 124% of the CL, then the customer is billed an adjustment factor 
equal to the difference between 124% of the CL and the actual number 
purchased times the non-recurring charge.\10\ The customer may increase 
its CL by submitting a written request, and is likely to do so given 
the ``growth penalty'' that applies if it does not promptly commit its 
unexpected demand growth to SBC.
---------------------------------------------------------------------------

    \10\ Because only 2, 3, 5, and 7-year commitments are counted 
when the shortfall penalty is calculated, the portability commitment 
penalizes carriers who have a large portion of their DS1 in month-
to-month or 1-year commitments, thus providing incentive to enter 
into longer contracts.
---------------------------------------------------------------------------

    19. If the customer terminates the Portability Commitment or wants 
to decrease the CL prior to the end of the 3-year commitment, 
termination liabilities apply. The termination liability is calculated 
as the decreased number of channel terminations multiplied by the 
prevailing month-to-month recurring rate multiplied by the number of 
months remaining in the portability commitment.
    20. To supply a portion of the services a customer has placed in 
the MVP umbrella, a competitor may have to reduce its rates to make up 
for payments such as the shortfall penalty and/or termination liability 
specified in the DS1 TPP. These payments are in addition to the 
penalties in the MVP. Together, the penalties in all the tariffs for 
services that a customer switches to a competitor are likely to be high 
enough to make the customer unprofitable for the competitor to win, 
even when the ILEC's overall level of prices for special access is 
above the competitor's long-run cost. Again, these provisions, and 
others like them in the various term and volume discount plans offered 
by the ILECs artificially increase a customer's cost of switching, and 
raise competitors' costs of acquiring customers.
    21. It is a tempting fallacy to think that optional discount plans 
cannot be harmful simply because consumers select them voluntarily. The 
claim that voluntary discounts cannot harm consumers assumes that basic 
month-to-month rates are not affected, but in fact, once an ILEC has 
contracted with some of its customers for a percentage discount off the 
month-to-month tariff, it has an incentive to raise the latter above 
the level that it would have chosen otherwise.\11\ In the longer term, 
exclusionary contracts can be expected to harm competition and 
customers, whether or not they decrease prices in the short run.
---------------------------------------------------------------------------

    \11\ See Borenstien, supra.
---------------------------------------------------------------------------

IV. Dr. Taylor's Analysis Cannot Show That ILECs Lack Market Power

    22. Dr. William Taylor has submitted a report \12\ arguing that 
price data show that Verizon lacks market power. The basic syllogism is 
that average revenue per unit measures have fallen, hence prices have 
fallen, hence there is no market power. Unfortunately, each step of 
this syllogism is fallacious. As a preliminary matter, I examine Dr. 
Taylor's claim that the average revenue per special access line has 
fallen over time. Next, I examine the first part of his syllogism, that 
reductions in the average revenue per line imply that prices of special 
access products have fallen. Finally, I analyze the second part of his 
syllogism, that reductions in price imply the absence of market power.
---------------------------------------------------------------------------

    \12\ Declaration of William E. Taylor on Behalf of Verizon, In 
the Matter of Special Access Rates for Price Cap Local Exchange 
Carriers, WC Docket No. 05-25. Henceforth, Taylor Declaration.
---------------------------------------------------------------------------

1. Flaws in the Average Revenue per Line as a Measure of Price

    23. Dr. Taylor claims that ``various measures of average revenue 
per circuit have fallen even as the demand for special access services 
has increased.'' \13\ After describing six limitations \14\ of his 
chosen price measure, the average revenue per line, he concludes: 
``Nevertheless, even with those caveats, the picture that emerges from 
the ARMIS average revenue per line data is quite clear: Average revenue 
per line has decreased over the 1996-2004 period and decreased faster 
during the pricing flexibility period (2001-2004).'' \15\ Dr. Taylor 
did not include sufficient information to verify his calculations.
---------------------------------------------------------------------------

    \13\ Taylor Declaration, at ] 9.
    \14\ Taylor Declaration, at ] 15.
    \15\ Taylor Declaration at ] 16.
---------------------------------------------------------------------------

    24. Dr. Taylor adjusted Special Access Revenue as reported in the 
ARMIS records to remove DSL revenues using data he obtained from 
Verizon on its DSL revenues for 2002-2004.\16\ These DSL revenues are 
not part of the public record, and Dr. Taylor does not include the data 
he obtained from Verizon in his Declaration. In addition, he removed 
DSL revenues for years prior to 2000 based on the observed growth of 
DSL revenues in the years of which he had data. Without the underlying 
data, it was not possible to judge whether his calculations were 
correct or whether the extrapolation was reasonable.
---------------------------------------------------------------------------

    \16\ Taylor Declaration at ] 18.
---------------------------------------------------------------------------

    25. Dr. Taylor relied on the number of access lines reported in 
ARMIS 43-08, columns fj and fk.\17\ The ARMIS Report instructions 
require carriers to calculate the number of special access lines as 
follows:
---------------------------------------------------------------------------

    \17\ Taylor Declaration at footnote 10.

    ``The number of 64 kbps or equivalent digital special access 
lines terminated at the customer designated premises: * * * Where 
DS-3 or DS-1 service is provided without individual 64 kbps circuit 
terminations, multiply the number of DS-3 terminations by 672 and 
the number of DS-1 terminations by 24 when calculating the value for 
this column.'' \18\
---------------------------------------------------------------------------

    \18\ FCC Report 43-08.

For DS1 and DS3 lines that are provided with individual 64 Kbps circuit 
terminations,\19\ the ARMIS data appear to provide a reasonable measure 
of capacity as represented by voice grade equivalent lines. For DS1 and 
DS3 lines that are provided without individual circuit termination, the 
ARMIS data would appear to overestimate the line count since it assumes 
that the entire capacity is used, whether or not it is, in fact, used. 
That is, a customer who needs only 12 DS0s worth of capacity, but who 
but buys a DS1 because it is less costly than 12 DS0s, is assumed to 
purchase 24 DS0s if the ILEC is not asked to provide individual circuit 
terminations. Accordingly, the average revenue per voice-grade 
equivalent is artificially reduced.
---------------------------------------------------------------------------

    \19\ A 64 Kbps line is equivalent in capacity to a voice grade 
circuit.
---------------------------------------------------------------------------

    26. I do not have the data to verify this downward bias in Dr. 
Taylor's estimate of the ``price.'' Nor can I verify that this bias has 
not increased over time, contributing, at least in part, to Dr. 
Taylor's finding that the average revenue per line has fallen over 
time. Since data communications lines often do not need individual 64 
Kbps terminations, and since data

[[Page 17224]]

communications grew more rapidly than voice communications during the 
period at issue, there was likely an increase in the fraction of lines 
for which the ARMIS reporting requirement resulted in an overcount of 
special access lines. If so, the ARMIS line count would grow at a 
faster rate than would be warranted by the actual growth in demand for 
capacity. The calculated average revenue per ARMIS line would then 
decline more quickly than the average revenue per unit of capacity 
actually demanded.
    27. In sum, Dr. Taylor's conclusions regarding the decline of the 
average revenue per line over time cannot be verified with the data 
available to me. There are sound reasons for believing that at least a 
part of the reduction may be due to ARMIS reporting conventions but 
this portion of the reduction cannot be quantified with the available 
data.
    28. Much of Dr. Taylor's analysis focuses on ``various measures of 
the average revenue per circuit.'' \20\ Dr. Taylor asserts that this is 
a reasonable proxy for price: ``Average revenue per voice-grade 
equivalent circuit is a reasonable measure of the price that customers 
actually pay for the special access service they receive.'' \21\
---------------------------------------------------------------------------

    \20\ Taylor Declaration, at ] 9.
    \21\ Taylor Declaration, at footnote 7.
---------------------------------------------------------------------------

    29. To calculate the average revenue per voice-grade equivalent 
circuit, Dr. Taylor divides the total revenue obtained from the 
services in question by the number of special access lines obtained 
from ARMIS 43-08. As I have indicated earlier, the ARMIS reporting 
convention results in an overcount of the demand for capacity, 
especially for lines used for data communication.
    30. The following illustrative example demonstrates my earlier 
point that the ARMIS measure of special access lines overstates the 
appropriate measure of capacity, and, as a result, contributes to 
underestimating the price per unit capacity actually paid by customers. 
Suppose a DS1 is priced at $365 per month, and a DS3 is priced at 
$2,290 per month.\22\ These prices are assumed to remain constant in 
this example. Therefore, the actual change in prices in this example is 
zero.
---------------------------------------------------------------------------

    \22\ These are standalone monthly rates charged by SBC in 
California in July 2004, as reported in the Declaration of M. Joseph 
Stith, WC Docket No. 04-313, Attachment 1, page 13 of 20.
---------------------------------------------------------------------------

    31. Consider a consumer who initially purchases 6 DS1 circuits for 
a total charge of $2,190. If the consumer uses all 144 voice-grade 
circuits in the 6 DS1s for voice traffic, the average revenue per used 
circuit would be $2,190/144 = $15.21. Suppose the consumer's calling 
volume increases, and 168 voice-grade circuits are now needed to carry 
the new calling volume. The consumer could order another DS1 for an 
additional $365, and use the additional 24 voice-grade circuits to 
carry the additional traffic. Alternatively, the consumer could replace 
the 6 DS1s with a DS3, set up 168 channel terminations on the DS3 and 
obtain the same quality of service that he would have obtained on 7 
DS1s. The additional cost of the DS3 would be only $100 ($2,290 for the 
DS3 less $2,190 for the 6 DS1s already in place). The DS3 would be less 
expensive than 7 DS1s, even though a large fraction of the DS3 was left 
idle.
    32. If the DS3 were provided with individual circuit terminations, 
the ARMIS record would reflect 168 special access lines, and the 
average revenue per unit would be $13.63 for a price reduction of 
10.4%. Thus this ARMIS record would show a relatively modest reduction 
in price even though no prices had been reduced.
    33. If the DS3 were provided without individual circuit 
terminations, the ARMIS record would reflect 672 terminations, and the 
average revenue per line would be $3.41 for a much larger apparent 
price reduction of 77.6%.
    34. But recall that the actual change in prices in this example is 
zero. The change in prices as measured by the average revenue per ARMIS 
line is -10.4% when channel terminations are provided by the BOC. The 
change in prices as measured by the average revenue per ARMIS line is -
77.6% when channel terminations are not provided by the RBOC. In this 
example, the average revenue per line falls regardless of the way in 
which ARMIS records the number of lines demanded by the customer, even 
though no prices have fallen. In general, the change in average revenue 
per ARMIS line will understate the change in prices paid by consumers, 
and in times of growing demand, overstate the reduction (if any) in the 
prices paid by consumers.
    35. Dr. Taylor tries to correct for some of the limitations of 
average revenue per line by calculating separate average revenues for 
DS1 and DS3 lines. Shifts from DS1 to DS3 circuits do not affect the 
average revenue per line for each category, removing one flaw in the 
average revenue measure. Dr. Taylor found that: ``DS-1 and DS-3 prices 
fell dramatically for Verizon East between 2000 and 2001; in fact, they 
fell at a much faster rate than would have been required by the price 
cap formula. Possible explanations include a national recession and the 
telecommunications industry meltdown.'' \23\
---------------------------------------------------------------------------

    \23\ Taylor Declaration, at ] 29.
---------------------------------------------------------------------------

    36. But DS-1 and DS-3 lines are not commodities supplied by price-
takers with upward-sloping supply curves. A recession or a 
telecommunications meltdown may lower demand but there is no clear 
reason to believe it raises demand elasticity or lowers the incremental 
cost of supplying such lines. A more natural ``composition effect'' 
explanation of this price reduction is available. Since DS1 lines are 
sold at different prices (with lower prices for longer term commitments 
and larger volumes purchased), a shift in demand from high price 
contracts to low price contracts can result in a reduction in average 
revenue per line even though no prices were reduced. The same plausible 
explanation applies to DS3 lines. Thus one cannot conclude that Dr. 
Taylor's partial disaggregation of all special access lines into DS1 
and DS3 lines repairs the flawed average revenue measure.
    37. For reasons described above, when customers upgrade from 
multiple DS0s to a DS1 or from multiple DS3s to OCn services, the 
decrease in average revenue per access line will overestimate the price 
reduction, if any.
    38. The limitations of measures similar to the Average Revenue per 
Special Access Line are well known. Indeed, in his published work on 
the long-distance market, Dr. Taylor pointed out several flaws with a 
related measure of price--the Average Revenue per Minute (ARPM) for 
long-distance calls. Dr. Taylor constructs a simple example with two 
products in which ``ARPM declines despite the fact both of the 
component usage prices have increased.'' \24\ Dr. Taylor constructs 
other simple examples to illustrate deficiencies of average revenues as 
measures of price, and points out that ``while AT&T's reported ARPM has 
declined, competition has not brought benefits of lower prices to low-
volume users.'' \25\
---------------------------------------------------------------------------

    \24\ William E. Taylor and J. Douglas Zona. ``An Analysis of the 
State Of Competition in Long-Distance Telephone Markets.'' Journal 
of Regulatory Economics 11:227-255 (1997). Page 238. Henceforth, 
Taylor and Zona.
    \25\ Taylor and Zona, page 240.
---------------------------------------------------------------------------

    39. In his Declaration, Dr. Taylor states that ``[t]he fact that 
prices fell much faster than GDPI-PI-X indicates that competitive 
forces have constrained LEC special access pricing, as anticipated by 
the Commission's pricing flexibility decision.'' \26\ To reach this 
conclusion, Dr. Taylor compares changes in the Average Revenue per

[[Page 17225]]

Line to the changes in the Price Cap Index (PCI). This is not a useful 
comparison. ILECs are required to compare an Average Price Index (API) 
to the PCI, and report this comparison to the FCC. Table 1 below, based 
on data submitted by Verizon BNTR to the FCC, shows that for special 
access lines taken as a whole, the actual change in prices is almost 
exactly equal to the reduction required by the price cap plan, strongly 
suggesting that the price cap was a binding constraint on Verizon's 
special access prices, contrary to Dr. Taylor's suggestion that 
competition has driven prices below the level required by price cap 
regulation.
---------------------------------------------------------------------------

    \26\ Taylor Declaration at ] 17.

                Table 1.--API and PCI for Verizon (BNTR)
------------------------------------------------------------------------
                                 2002       2003       2004       2005
------------------------------------------------------------------------
Total Special Access PCI....      47.88      45.73      43.40      43.47
Total Special Access API....      47.88      45.73      43.40      43.33
------------------------------------------------------------------------
 Source: Verizon TRP Filings.

Moreover, rates in pricing flexibility areas have increased,\27\ 
suggesting that competitive carriers have not been able to discipline 
the incumbents' special access prices in areas that have been deemed 
competitive.
---------------------------------------------------------------------------

    \27\ Evidence supporting this point can be found in: In the 
Matter of Special Access Rates for Price Cap Local Exchange 
Carriers, WC Docket No. 05-25. Comments of CompTel/ALts, Global 
Crossing North America, Inc., and NuVox Communications, Pages 6-9.
---------------------------------------------------------------------------

2. The Relationship between Trends in Prices and Market Power

    40. Dr. Taylor's Declaration largely focuses on attempting to show 
that prices for special access have fallen over time. He infers that 
Verizon does not have market power. For instance, in his Declaration he 
writes:

    ``A careful analysis of that data does not show that Verizon has 
been able to exercise market power. On the contrary, prices for 
individual DS1and DS3 services, as well as average revenue per 
special access circuits have fallen steadily for special access 
circuits.'' At 6.
    ``Customers have benefited from additional competition and 
pricing flexibility as demonstrated by the continuing expansion of 
demand volumes accompanied by continuing falling prices.'' At 4.
    ``The NPRM entails a second analysis that entails accessing the 
level of and changes in the degree of competition in the markeplace, 
``short of conducting a burdensome market power analysis'', against 
which the Commission warned in ] 72 of the NPRM. Unfortunately, 
after that warning, the NPRM (] 72-111) immediately sets out 
precisely the information requirements and calculations that would 
be necessary to undertake a market power analysis for special access 
services. Fortunately, however, the evidence from recent trends in 
quantities and prices of special access services makes such an 
analysis unnecessary, as the primary price and quantity data show no 
signs of the exercise of market power by incumbent providers.* * * 
Using a variety of data sources, I show that various measures of 
average revenue per circuit have fallen even as the demand for 
special access services has increased.'' At 8-9. (Emphasis added).

    41. But even if Dr. Taylor were correct that a decline in average 
revenue is a reasonable proxy for a decline in price, price reductions 
do not prove lack of market power. Even a monopoly will reduce price if 
marginal costs fall or if demand becomes more elastic. In addition a 
firm with decreasing, but still very substantial, market power will 
reduce prices for that reason.
    42. While there are pitfalls in using price-cost data to make 
references about the state of competition, it is clear that in any such 
endeavor it logically is the relative levels of price and cost, not the 
rate of change of price, that matter. Moreover, the Commission is 
concerned about whether prices are just and reasonable, not (only) with 
determining whether firms ``lack market power.''
    43. In his published work on competition in long distance markets, 
Dr. Taylor has argued that competitive prices will allow successful 
firms to recover their forward-looking incremental costs including an 
acceptable return on its investment.\28\ He observed that the presence 
of high operating margins supports the conclusion that regulated 
competition has not produced substantiall consumer benefits.\29\ Dr. 
Taylor also recognizes that lower prices and increased demand can 
somtimes be mistakenly ascribed to competition.\30\
---------------------------------------------------------------------------

    \28\ Taylor and Zona, page 230.
    \29\ Taylor and Zona, page 229.
    \30\ Taylor and Zona, page 237.
---------------------------------------------------------------------------

    44. In his Declaration in this Proceeding, Dr. Taylor himself 
recognizes the limitations of an analysis of trends in prices without 
information about costs. ``Treating a small but significant 
nontransitory increase in price as an exercise of market power assumes 
the initial prices is a competitive market price. Suppose 10 years of 
price cap regulation had constrained ILEC special prices to lie below a 
competitive market level. In that case, a significant and sustained 
price increase when price cap regulation was removed would be welfare-
increasing rather than an exercise in market power.'' \31\ Elsewhere in 
the Declaration, Dr. Taylor states: ``In antitrust economics, this 
error--treating an increase from the current price as an exercise in 
market power--is called the ``Cellophone fallacy''* * *'' \32\ However, 
Dr, Taylor's analysis does not actually compare his measure of the 
BOC's special access prices to any benchmark of cost.
---------------------------------------------------------------------------

    \31\ Taylor Declaration at 36.
    \32\ Taylor Declaration at footnote 21.
---------------------------------------------------------------------------

    45. Dr. Taylor's comparison of the average revenue per special 
access line to this price reductions required under price caps provides 
to useful information on the relationship of prices to costs.\33\ Under 
traditional price caps, the price cap formula of inflation (or GDP-PI) 
less increase in productivity in the telecommunications sector (or the 
X-factor) is intended to capture the expected reduction in cost that 
would be achieved by the regulated firm operating efficiently. As Dr. 
Taylor himself points out, actual price changes may vary dramatically 
from the average change embodied in the price cap, so that differences 
between prices (especially when they are misrepresented by the average 
revenue per line) and the price cap in the short run may not contain 
useful information on the state of competition, as indicated by the 
price-cost margin.\34\ In the event, the cap under the CALLS plan was 
never intended to represent expected changes in cost, and a comparison 
of price changes to GDP-PI--X during the CALLs period is not helpful in 
determining whether prices are converging to the relevant costs.
---------------------------------------------------------------------------

    \33\ See Figure 3, and the associated discussion. Taylor 
Declaration, page 9.
    \34\ Taylor Declaration at 31.
---------------------------------------------------------------------------

    46. Dr. Taylor also suggests that problem of allocating common 
costs make direct price-cost comparison impossible. This is correct if 
the costs of special access are predominantly common costs as between 
special access

[[Page 17226]]

and other services, but not if a large fraction of the cost is the cost 
of customer-specific last-mile infrastructure that the customer uses 
for special access. Indeed, as I have argued elsewhere,\35\ a core 
principle of Telecommunications Act unbundling is that the common-cost 
problem much less severe if one is pricing network elements such as 
loops than if one is pricing services such as long-distance access. I 
understand that special access is essentially the full bundle of 
services of the loop or similar last-mile infrastructure (perhaps 
together with transport).
---------------------------------------------------------------------------

    \35\ Joseph Farrell, ``Creating Local Competition'', Federal 
Communications Law Journal 49:1, November 1996, 201-215.
---------------------------------------------------------------------------

    47. The BOCs have not submitted estimates of the forward-looking 
economic costs of special access, focusing instead on limitations of 
available accounting costs in the ARMIS records. However, forward-
looking economic costs can be estimated using two reasonable 
approaches. First, UNE rates for dedicated transport are often based on 
forward-looking economic costs calculated using an engineering-
economics cost proxy model. I understand that high capacity UNEs (DS1s 
and DS3s) and perhaps especially EELs are the functional equivalent of 
special access, so directly relevant UNE rates exist. Second, the rates 
charged by a competitive provider of special access services are 
unlikely to be systematically below its forward-looking economic cost. 
Thus UNE rates and CLEC special access charges may be useful benchmarks 
for comparing an ILEC's special access rates versus forward-looking 
long-run cost.
    48. The record in this proceeding includes a substantial amount of 
information on the relationship between UNE prices and special access 
prices, including:

    ``In comparing special access vs. UNE prices, Worldcom found the 
jDS1 UNE loops were about 18% less than comparable special access 
prices and DS3 UNE loops 28% less. The fixed portion of transport 
under UNEs was about 10% less for DS1s and the fixed DS3 transport 
UNE prices were actually higher than special access. On the other 
hand, major variances occurred on interoffice mileage (average DS1 
UNE per mile charge was $1.52 vs. $13.72 for special access, and for 
DS3s it was $23.35 vs. $57.84).'' \36\
---------------------------------------------------------------------------

    \36\ Henry G. Hultquist, Worldcom, Letter to Marlene H. Dortch, 
10/29/02, FCC, Docket CC 96-98, 98-147, 01-338 (p. 7).
---------------------------------------------------------------------------

    ``In Atlanta, the mileage component of a 10-mile (UNE) EEL was 
$1.80, whereas BellSouth charge $180 in mileage in MTM special 
access prices or $80 under their discount plan. Similar disparities 
are found in Southwestern Bell and Ameritech (pp 21-22, 33-34). 
Additionally, mileage costs were twice as high in price flex MSAs 
($8/mile) than under price caps ($3.90/mile).'' \37\
---------------------------------------------------------------------------

    \37\ NuVox, Initial Comments, 10/4/04, WC 04-313, p. 22.

    49. A study by Mr. Joseph Stith of AT&T compares (a) special access 
rates in price cap areas to the corresponding rates in areas where the 
BOCs have been granted pricing flexibility, (b) price cap rates to the 
corresponding UNE rates, and (c) price flexibility rates to UNE rates. 
He finds that ``for a 10-mile circuit the Bells' tariffed rates are on 
average, significantly above their rates for equivalent UNEs.'' \38\ 
Mr. Stith finds similar results for zero-mile circuits.
---------------------------------------------------------------------------

    \38\ Declaration of M. Joseph Stith, WC Docket No. 04-313, 
September 30, 2004. At 17.
---------------------------------------------------------------------------

    50. In its Comments in this Proceeding, BellSouth Submitted a study 
by RHK showing that ILEC prices substantially exceed either comparable 
UNE rates or competitors' rates.\39\ The study reports that BellSouth's 
average special access prices are $240, $1,356 and $5,077 for DS1, DS3 
and OCN circuits. The average prices for BellSouth's UNE transport 
element for DS1 and DS3 circuits are reported to be $141 and $623, or 
about half the corresponding special access prices. The average prices 
charged by competitive carriers for DS1, DS3 and OCN circuits are 
reported to be $140, $700, and $3,300, respectively, or about half the 
corresponding Bell special access prices. Since UNE prices are based on 
estimated forward-looking costs and since competitive carriers 
presumably seek at least to cover their forward-looking costs, the RHK 
study is consistent with the conclusion that BellSouth's special access 
prices considerably exceed forward-looking costs.
---------------------------------------------------------------------------

    \39\ Declaration of Stephanie Boyles, June 8, 2005. WC Docket 
No. 05-25.
---------------------------------------------------------------------------

    51. The RHK study purports to show that BellSouth has a small 
revenue share for many categories of special access services, yet it 
reports that BellSouth's prices for these services are significantly 
higher than the prices charged by competing carriers, and also 
considerably higher than UNE rates. The study does not explain why, in 
an apples-to-apples comparison, BellSouth is able to charge a 
substantial premium over its competitors, and maintain prices in excess 
of UNE rates based on forward-looking costs.
    52. The evidence thus suggests that special access rates are often 
significantly above corresponding UNE rates. The UNE rates are based on 
forward-looking cost, incorporating (unlike competitive carriers' 
pricing) ILEC-level economies of density. ILEC's special access rates 
are also considerably higher than the rates charged by competitive 
carriers.

Certification

    I hereby certify, under penalty of perjury, that the statements 
and information contained in my declaration are correct and true to 
the best of my knowledge.

Joseph Farrell,
29 July, 2005.

Attachment 3--Comments of Elliot Spitzer, Attorney General, State of 
New York, on the Proposed Final Judgments

In The United States District Court For The District of Columbia

United States of America, Plaintiff, v. SBC Communications, Inc. and 
AT&T Corp. Defendants; Judge: Emmet G. Sullivan

[Civil Action No. 1:05CV02102]

United States of America, Plaintiff, v. Verizon Communications Inc. and 
MCI, Inc., Defendants; Judge: Emmet G. Sullivan

[Civil Action No. 1:05CV02103]

Comments of Eliot Spitzer, Attorney General, State of New York, on the 
Proposed Final Judgments

    Pursuant to Section 2(b) of the Antitrust Procedures and Penalties 
Act, 15 U.S.C. 16, Eliot Spitzer, the Attorney General of the State of 
New York, respectfully submits the following comments on the Proposed 
Final Judgments \1\ (``PFJs'') in the above referenced matters.
---------------------------------------------------------------------------

    \1\ Department of Justice, Antitrust Division, United States v. 
SBC Communications Inc. and AT&T Corp.; Competitive Impact 
Statement, Proposed Final Judgement, Complaint, Stipulation, 70 FR 
74334 (Dec. 15, 2005); Department of Justice, Antitrust Division, 
United States v. Verizon Communications Inc. and MCI, Inc.; 
Competitive Impact Statement, Proposed Final Judgement, Complaint, 
Stipulation, 70 Fed. Reg. 74350 (Dec. 15, 2005).
---------------------------------------------------------------------------

I. Introduction

    The New York Attorney General (``AG'') is charged with enforcing 
state and Federal antitrust and consumer protection laws. The AG 
advocates in administrative and judicial proceedings on behalf of New 
York State, consumers, and the public interest generally. The AG has 
long advocated on behalf of competition in the telecommunications 
sector in both the national and state legal and regulatory area. The AG 
has participated actively in numerous New York Public Service 
Commission proceedings to support competition in New York State and has 
filed comments there as well as at the FCC on a broad range of 
telecommunications

[[Page 17227]]

competition issues over the years, including comments with both 
agencies regarding the proposed Verizon-MCI merger.\2\
---------------------------------------------------------------------------

    \2\ See, e.g., http://www.oag.state.ny.us/telecommunications/telecommunications.html.
---------------------------------------------------------------------------

    Through Verizon New York Inc., Verizon Communications Inc. 
(``Verizon'') provides regulated and unregulated telecommunications 
services in New York, and is the dominant provider in multiple service 
markets from Maine to Virginia. MCI Inc.'s (``MCI'') subsidiaries 
provide telecommunications services on a regulated and unregulated 
basis in New York and, since before the breakup of AT&T in 1984, MCI 
has played a key competitive role in business, long distance and local 
service markets.
    While SBC Communications, Inc. (``SBC'') has had only a limited 
competitive presence in New York, it provides regulated and unregulated 
telecommunications services and is the dominant provider in multiple 
service markets in 13 states.\3\ AT&T Corporation (``AT&T'') provides 
telecommunications services on a regulated and unregulated basis in New 
York and is the nation's largest provider of enterprise services, while 
also establishing itself as a leading long distance and local service 
competitor.
---------------------------------------------------------------------------

    \3\ Although SBC has chosen to adopt AT&T's name following its 
merger closing, we refer to the two companies by their pre-merger 
identities to avoid ambiguity.
---------------------------------------------------------------------------

    Together, MCI and AT&T maintain the most comprehensive local and 
long-haul facilities which are required by major enterprise customers. 
Since the Telecommunications Act of 1996, AT&T and MCI have also 
established themselves as the most successful competitive local 
exchange carriers (``CLECs'') in New York and nation-wide.
    Telecommunications are vital to New York's information-intensive 
economy, which is the national and global center of the financial 
services and other major industries. For over a generation, increased 
competition in telecommunications has been the driving force behind 
fair prices, high quality, innovative offerings and greater access to 
services. As a result of New York City's economic preeminence, 
increased competition for telecommunications services took hold here 
before other parts of the state and country, and has been the most 
robust. The Tunney Act process can play an essential role in ensuring 
that strong competition continues in New York and nationwide.
    While the U.S. Department of Justice (``DOJ'') attempts to downplay 
the role for the Court in reviewing the adequacy of the PFJs, Congress 
has made this Court the final arbiter of the propriety of these mergers 
under the antitrust laws. The Court must ``determine that the entry of 
such judgment is in the public interest,'' and, if it cannot so find, 
it must reject the PFJ unless more adequate provisions are made to 
protect the public interest. 15 U.S.C. 16(e). See, e.g., United States 
v. Microsoft Corp., 56 F.3d 1448, 1458 (D.C. Cir. 1995) (``Congress, in 
passing the Tunney Act, intended to prevent `judicial rubber stamping' 
of the Justice Department's proposed consent decree[s]'') (reversing 
district court's rejection of consent decree on other grounds).
    Taken together, these mergers will change the face of the 
telecommunications industry. Post-merger these two companies will 
overwhelmingly dominate telecommunications markets and will be in a 
position to inhibit competition, customer choice and innovation. The 
remedies contained in the PFJs are unlikely to constrain the merged 
entities.
    There are two key areas of concern. First, the PFJs inadequately 
address local private lines, which are of major importance to business 
customers. Second, the PFJs ignore the effect of the mergers on 
Internet access. For the reasons discussed below, this Court should 
find that these mergers are not in the public interest and reject the 
PFJs.

II. Local Private Lines

    As DOJ acknowledges, the mergers will lessen competition 
substantially for Local Private Lines (``LPLs''), more commonly know as 
``special access'' lines. LPLs are dedicated point-to-point circuits, 
that enable secure high-speed voice and data transfer typically used by 
businesses and other enterprises. LPLs are especially critical for 
inter-office communications in the financial services industry, a key 
component of New York's economy.

A. The Mergers Will Eliminate Facilities-Based Competition in the 
``Last Mile''

    The most critical component of an LPL is the ``last mile,'' i.e., 
the last stretch of the connection from the carrier's network to the 
commercial building in which the customer is located. As incumbent 
local exchange carriers (``ILEC''), Verizon and SBC are often the only 
carriers with access to many buildings. CLECs must lease last-mile 
access from these incumbents if no other provider has gained access to 
the customer's location, and if right-of-way excavation or building 
entry costs inhibit the CLEC from constructing a new last mile 
connection of its own.
    MCI and AT&T have made the most significant inroads of all 
competitors to Verizon and SBC in gaining access to commercial 
buildings, by going through the time-consuming and costly process of 
laying their own competitive access lines. MCI and AT&T also lease last 
mile facilities from the ILECs to reach customers in buildings not 
reached by any CLEC. In many buildings in major commercial centers 
nationwide, MCI and AT&T have become key competitive carriers, who 
offer customers seeking LPL service a choice other than the incumbent 
ILEC. Entry into the retail special access market by CLECs other than 
MCI and AT&T, via laying their own last-mile connections, is 
negligible. This retail competition by MCI and AT&T will be eliminated 
by the mergers.

B. The Mergers Will Eliminate Discounted ``Last Mile'' Wholesale 
Leasing

    The ILECs lease bundled long-haul and last-mile LPL facilities to 
CLECs at significant large-volume discounts, which only AT&T and MCI 
can take advantage of because of their scale and ability to make 
longer-term purchase commitments. Thus, MCI and AT&T have also been 
essential players providing competition in the wholesale market for 
last mile access. MCI and AT&T have acted as price constrainors on the 
ILECs. MCI and AT&T have also resold the incumbent ILECs' last mile 
access to other, smaller CLECs at discounted rates. Without this 
secondary wholesale market offered by AT&T and MCI, smaller CLECs will 
no longer have access to these discounted prices.

C. The Remedy Proposed by the PFJ for the ``Last Mile'' Is Inadequate

    In order to preserve some competition in the retail market for last 
mile access, the Verizon-MCI PFJ requires Verizon to divest a miniscule 
number of MCI-owned telecom facilities in individual buildings where 
MCI is the only telecom provider besides Verizon with last-mile 
connections in the building. Likewise, SBC would have to divest certain 
AT&T assets according to a similar scheme. These minimal divestitures 
will affect only a handful of buildings in major markets--a mere 17 in 
all of New York City, and only 38 buildings throughout all of New York 
State. Although Verizon and MCI are competitors in many hundreds of 
buildings in New York State, DOJ has used an unduly narrow permissive 
screen, which results in only 38 buildings receiving limited

[[Page 17228]]

divestitures to address adverse competitive effects of the mergers.
    DOJ is missing the forest for the trees. As a threshold matter, an 
individual building cannot plausibly be a geographic market for 
antitrust purposes. Indeed, here, the buildings are simply scattered 
commercial locations amidst MCI's existing network in New York City and 
statewide. They do not, themselves, form the critical mass needed to 
build a network. Nor are they network gateways or anchors that might 
have distinctive value. In consequence, any would-be competitor who 
acquired the divested MCI facilities serving these scattered buildings 
would have neither the scope nor scale necessary to stand in MCI's 
competitive shoes. It is, therefore, hard to see how this remedy could 
have any significant positive effect on competition beyond the 
footprint of the handful of individual buildings identified--assuming 
that the divestitures can be accomplished at all. Is the DOJ really 
prepared to inform the Court that the divestiture of access lines into 
these few buildings will have a competitive impact on pricing in 
general for LPL access in either New York City or the state generally? 
If not, the proposed remedy is mere window dressing.
    Moreover, under the PFJ, DOJ retains the right, in its sole 
discretion, to exclude assets and rights.\4\ Thus, even the 38 
buildings in New York state could disappear from the Verizon-MCI PFJ 
divestiture list if DOJ concludes that any or all are not necessary to 
remedy the competitive harm. In other words, the remedy is written in 
disappearing ink. Either the divestitures are needed to remedy a likely 
antitrust violation or they are not. Surely the Court cannot be 
expected to decide that the public interest is served by a decree that 
has the potential for its divestiture remedies to vanish.
---------------------------------------------------------------------------

    \4\ 70 FR at 74365 (``Lastly, with the approval of the United 
States, in its sole discretion, and at the purchaser's option, the 
Divestiture Assets may be modified to exclude assets and rights that 
are not necessary to meet the aims of this Final Judgement. This 
will allow for minor modifications of the Divestiture Assets to 
exclude assets that may not be necessary in order to remedy the 
competitive harm.'')
---------------------------------------------------------------------------

III. Internet Access Issues

    The two proposed mergers raise antitrust concerns relating to 
Internet services, concerns that are not sufficiently addressed by the 
PFJs.
    The PFJs do not address whether Verizon and SBC should be required 
to permanently provide unbundled, stand-alone DSL service to all 
customers, nor do the PFJs prohibit discrimination in favor of 
Verizon's or SBC's own services in the use of their Internet backbone. 
The risks associated with these trends are real and will have serious 
adverse effects on competition and the public if unchecked.
    These two transactions will result in the two combined companies 
controlling over fifty percent of the nation's Internet backbone.\5\ 
Recent post-merger statements by the Chief Executive Officers of 
Verizon and SBC foreshadow the companies' plans to manage access to 
their Internet backbone more restrictively, by, for example, charging a 
premium for priority access.\6\
---------------------------------------------------------------------------

    \5\ Nicholas Economides, The Economics of the Internet Backbone, 
NYU Law and Economics Working Papers, Paper 4, p. 377 (2004).
    \6\ See, e.g., Arshad Mohammed, ``SBC Head Ignites Access 
Debate,'' Wash. Post., Nov. 4, 2005 at D01.
---------------------------------------------------------------------------

A. DSL

1. Unbundled DSL
    Both Verizon and SBC offer consumers access to the Internet through 
broadband connections known as Digital Subscriber Lines (``DSL''). DSL 
service is a dedicated high speed digital connection to the Internet 
provided over the traditional copper telephone lines. Verizon and SBC 
offer DSL service to their in-region small business and residential 
customers over these standard wireline connections.\7\
---------------------------------------------------------------------------

    \7\ While other variations of DSL, used primarily by medium and 
larger business customers, do not share a telephone line with voice 
traffic, these comments focus on the residential and small business 
DSL market.
---------------------------------------------------------------------------

    DSL is necessary for customers to use telephone wires to access 
high speed data services as well as voice over Internet protocol 
(``VOIP'') services. Typically, Verizon and SBC bundle DSL with their 
wireline voice services. This type of offering inhibits customers' 
ability to choose a competing provider for voice or data services.
    For example, telephony using VOIP has the potential to be a major 
competitor to wireline telephone services. But stand-alone VOIP 
requires customers to secure broadband ``last mile'' access from 
another provider, typically via DSL. By only selling its DSL service 
bundled with its monopoly voice service, Verizon and SBC discourage 
their customers from choosing competitive VOIP providers. The Verizon 
customer cannot give up the Verizon voice service in favor of a 
competitive VOIP provider while keeping the customer's Verizon DSL 
broadband access. The negative effects on competition are apparent, and 
indeed, may snuff out VOIP's competitive potential before it even takes 
off.
2. Verizon Offers Stand-Alone DSL Only On a Limited Basis
    In March 2005, the FCC ordered Verizon and other carriers to allow 
their existing customers who subscribe to the carriers' voice and DSL 
service to port their phone numbers to a new voice carrier.\8\ In 
response, Verizon informed competing voice carriers that such customers 
should be advised that porting the number, and thus terminating their 
Verizon voice service, would cause their Verizon DSL service to be 
disconnected as the two services were inseparable.\9\ Subsequently, 
during the FCC and DOJ review of the Verizon-MCI merger, Verizon 
publicly expressed a willingness to allow its existing customers in the 
former Bell Atlantic service territories to maintain their Verizon DSL 
broadband service in the event that they discontinued Verizon's 
telephone service.\10\ However, even this option is not available to 
new Verizon customers or those outside the former Bell Atlantic service 
territories who seek to subscribe to stand-alone DSL at the outset.\11\ 
For these customers, the only way to obtain VOIP with Verizon DSL would 
be to subscribe initially to Verizon's voice telephony and DSL, to pay 
the required connection charges, and only thereafter to jettison the 
unwanted voice service. This

[[Page 17229]]

constitutes a significant anticompetitive hurdle.
---------------------------------------------------------------------------

    \8\ FCC Docket Number WC 03-251, BellSouth Emergency Request for 
Declaratory Ruling, FCC 05-78, Memorandum Opinion and Order and 
Notice of Inquiry, rel. March 25, 2005, 20 FCC Rcd 6830; 2005 FCC 
LEXIS 1817; 35 Comm. Reg. (P & F) 1063.
    \9\ Verizon claimed that customer identification issues 
prevented it from offering wireline and DSL services independent of 
each other. By contrast, Qwest Communications International Inc., 
the smallest regional Bell operating company (``RBOC''), has offered 
stand-alone DSL for quite some time. See Yuki Noguchi, Merger 
Critics Seek Telecom Regulation, Wash. Post, April 20, 2005, at E5. 
The inference is inescapable that Verizon is deliberately stalling 
so as to hinder competition from other VOIP providers.
    \10\ Matt Richtel, Some Verizon Customers to Get Stand-Alone 
D.S.L., N.Y. Times, April 19, 2005, at C7. In conjunction with the 
April 18, 2005 announcement, in a notice to CLECs, Verizon explained 
that CLECs no longer had to alert customers that porting would 
result in disconnecting their DSL service. Instead, Verzion said 
that CLECs should alert customers that DSL service might be 
disconnected, and that the customer should contact Verizon to 
determine how to handle the service. There still seems to be some 
ambiguity whether every existing Verizon customer seeking stand-
alone DSL will actually be able to do so. Moreover, Verizon has not 
disclosed whether its stand-alone DSL will be priced at a premium or 
at a price comparable to that of the DSL component of the bundled 
product.
    \11\ E.g., those customers formerly served by GTE before its 
acquisition by Bell Atlantic would not have the option of stand-
alone DSL.
---------------------------------------------------------------------------

    While retarding competitive entry by VOIP providers in this manner, 
Verizon has committed billions of dollars to expand its fiber-to-the-
premises (FTTP) network. As this expansion is completed, it will allow 
Verizon to replace its DSL service with an array of high speed products 
to better compete with broadband and video services offered by cable 
providers. Thus far, however FTTP is available only in limited 
areas.\12\ While the roll-out of FTTP progresses Verizon has little 
incentive to offer stand-alone DSL--particularly when refraining from 
doing so hinders VOIP providers from competing against Verizon's 
monopoly voice product.
---------------------------------------------------------------------------

    \12\ News Release, Verizon Communications Inc., Verizon Brings 
Blazing-Fast Computer Connections to 5 Long Island Communities, 
(April 11, 2005) available at http://newscenter.verizon.com/proactive/newsroom/release.vtml?id=90318 (``Verizon customers in 
Massapequa, Wantagh, Franklin Square, Port Washington and Oyster Bay 
now can experience breathtaking high-speed Internet access as the 
company begins to offer its Verizon FiOSSM (FYE'-ose) 
Internet Service to homes here.'').
---------------------------------------------------------------------------

    Indeed, Verizon's own Annual Report indicates that offering DSL and 
other services on an unbundled basis is not likely to be a high 
priority for Verizon at all, as the bundles themselves give Verizon a 
competitive advantage over other service providers. Verizon's 2004 
Annual Report highlights the company's ``continuing initiatives to more 
effectively package and add more value to our products and services. 
Innovative product bundles include local wireline services, long 
distance, wireless and DSL for consumer and business retail customers. 
* * * These efforts will also help counter the effects of competition 
and technology substitution that have resulted in access line losses in 
recent years.'' \13\
---------------------------------------------------------------------------

    \13\ Verizon Communications Inc., 2004 Quarterly Report (for the 
period ending September 30, 2004), pp. 20-21 (2005). See also 
Verizon Communications Inc., 2003 Annual Report, Exhibit 13 (2004) 
(noting that decreases in certain revenue streams were ``partially 
offset by increased demand for our DSL services''). Last year, 
Verizon noted that ``[a]s of year-end 2003, approximately 48% of 
Verizon's residential customers have purchased local services in 
combination with either Verizon long distance or Verizon DSL, or 
both.'' Verizon Communications Inc., 2003 Annual Report, p. 6 
(2004). By September 30, 2004, that number had increased to 53%. 
Verizon, 2004 Quarterly Report (for the period ending September 30, 
2004), p. 26 (2005).
---------------------------------------------------------------------------

3. The FCC Required That Verizon and SBC Offer Stand-Alone DSL
    The significance of the stand-alone DSL issue is demonstrated by 
the merger conditions ordered by the FCC and various state regulators. 
As part of the approval of the Verizon/MCI and SBC/AT&T transactions, 
the FCC required that the parties make stand-alone DSL available to 
customers in region without requiring the purchase of wireline 
telephone services for a period of two years.\14\ While this condition 
recognized the competitive value of stand-alone DSL, the two year time 
frame moots its effect. The scheduled expiration of the requirements 
will not only cripple VOIP as a competitive voice telephone service; 
the mere prospect of such an event is likely to inhibit investment and 
growth mass market VOIP providers.
---------------------------------------------------------------------------

    \14\ FCC Docket No. 05-65, In the Matter of SBC Communications 
and AT&T Corp. Applications for Approval of Transfer and Control, 
FCC 05-185 Memorandum Opinion and Order, adopted October 31, 2005, 
rel. Nov. 17, 2005, 2005 FCC LEXIS 6385; 37 Comm. Reg. (P & F) 321; 
FCC WC Docket No. 05-75, In the Matter of Verizon Communications 
Inc. and MCI, Inc. Applications for Approval of Transfer of Control, 
FCC 05-184, Memorandum Opinion and Order, adopted Oct. 31, 2005, 
rel. Nov. 17, 2005 FCC LEXIS 6386; 37 Comm. Reg. (P & F) 416. The 
New York Public Service Commission also ordered Verizon to provide 
unbundled DSL, also for a period of two years. New York State Public 
Service Commission, Order Asserting Jurisdiction and Approving 
Merger Subject to Conditions, Case 05-C-0237, Joint Petition (issued 
November 22, 2005).
---------------------------------------------------------------------------

    The public interest should not depend on whether Verizon and SBC 
decide to offer stand-alone DSL of their own volition after the two-
year requirement expires. Recognizing the advantage that Verizon and 
SBC derive from offering their DSL service only as a bundled product, 
DOJ should have considered whether Verizon and SBC are likely to 
eliminate DSL on a stand-alone basis as soon as the FCC's merger 
conditions expire. In approving the transactions, DOJ should have 
required customer access to unbundled services for longer than two 
years as a condition of its approval.

B. The Internet Backbone

1. The Mergers Will Increase Internet Backbone Concentration
    The combinations of Verizon with MCI and SBC with AT&T will 
dramatically increase concentration of Internet backbone facilities, 
and will enable Verizon and SBC to exert market power over competing 
Internet service providers (``ISPs'') and content providers, to the 
detriment of consumers.\15\ In recent statements, executives of both 
Verizon and SBC have stated that they intend to abandon the established 
practice of equal access for all Internet traffic by favoring their own 
services and charging premiums to competing ISPs for providing 
comparable service.\16\ All other traffic would be subjected to lower 
grade service. This prospect could have significant anticompetitive 
impacts on a number of Internet-based services, such as those that rely 
upon video streaming, and would alter the very nature of the Internet.
---------------------------------------------------------------------------

    \15\ The vast majority of Internet users in the United States 
access the Internet infrastructure through ISPs. While AOL is by far 
the largest ISP, many smaller ISPs exist, some of whom have 
customers only in limited regions. Nicholas Economides, supra, p. 
375.
    \16\ See e.g., Dionne Searcey and Amy Schatz, ``Phone Companies 
Set Off Battle Over Internet Fees,'' Wall St. Journal, Jan. 6, 2006 
at A1.
---------------------------------------------------------------------------

    The Internet backbone comprises high speed hubs, to which customer 
data packets, including electronic mail and voice services, are sent by 
ISPs, and high speed circuits that connect the hubs to move data from 
one location to another. In most instances, the data is broken up into 
smaller packets to speed delivery. Because the data packets usually 
flow over multiple providers' backbones before reaching their final 
destinations, different providers' backbones must interconnect to 
deliver customer traffic.\17\ Thus, the Internet backbone provides data 
transport and routing services, moving the data to the appropriate 
destinations with a minimum of loss and delay.
---------------------------------------------------------------------------

    \17\ Nicholas Economides, supra, p. 375. For a more detailed 
understanding of the Internet backbone see Michael Kende, The 
Digital Handshake: Connecting Internet Backbones, FCC Office of 
Plans and Policy Working Paper No. 32 (September 2000) and Nicholas 
Economides, supra.
---------------------------------------------------------------------------

    The primary Internet infrastructure in the U.S. has approximately 
ten major backbones--often referred to as ``Tier 1 providers''--plus 
independent ISPs that use this backbone to provide services to 
customers.\18\ One source identifies MCI and AT&T as two of the world's 
top five Internet backbones.\19\ According to In Stat-MDR, a market 
research firm, ``[a]t the end of 2000, 10 backbone providers generated 
92 percent of all wholesale ISP revenues'' in the U.S.\20\ In Stat-MDR 
found that the three top providers in 2002 were MCI with 44% of the 
Internet backbone, Genuity with 12.5% and Sprint with 9.4%.\21\ Based 
on those numbers, these three providers alone comprise two-thirds of 
the Internet backbone market and yield an Herfindahl-Hirshfeld Index of 
2180 without including the remaining smaller

[[Page 17230]]

providers. This would be considered a highly concentrated market.
---------------------------------------------------------------------------

    \18\ Data about the Internet backbone are often incomplete or 
outdated or do not specifically identify whether the data are based 
on usage, revenue or some other measure. The merging parties were 
unable and/or unwilling to provide current data during the review of 
the transactions.
    \19\ Internet Backbone Lookup Page, http://www.cybercon.com/backbone.html. The others are Sprint, Qwest and Level 3.
    \20\ ISP-Planet Staff, ISP Backbone Market Forecast: Flat 
Through 2002 at http://isp-planet.com/research/2002/backbone_020123.html.
    \21\ Id.
---------------------------------------------------------------------------

    Tier 1 Internet backbone providers achieve interconnection of their 
backbones through what is known as ``peering.'' Through peering, Tier 1 
providers agree to afford each other the ability to freely move data 
across networks without fees in mutually beneficial arrangements. 
Smaller backbone providers, on the other hand, are frequently 
considered free riders, as they generate too little traffic to be 
peering partners. Because Tier 1 providers generally do not consider 
no-fee peering with small providers to be sufficiently beneficial, 
smaller providers often enter into fee-based agreements--called 
``transit'' arrangements--with Tier 1 providers.
    These fee-based arrangements for interconnection are not 
necessarily problematic in a competitive market. However, if only a few 
providers control backbone access, the resulting opportunity for these 
few to hinder the operations of smaller backbone competitors by 
refusing to interconnect with them, or by imposing onerous fees or 
conditions on interconnecting, has significant anticompetitive and 
public interest implications. Those Tier 1 backbone providers would 
have both the ability and incentive to, for example, charge 
significantly higher fees, prioritize their own data packets, block 
certain ISP transmissions, or end their cooperative relationships with 
smaller backbones entirely.\22\
---------------------------------------------------------------------------

    \22\ Kende, supra, pp. 18-23.
---------------------------------------------------------------------------

    Consequently, regulatory action has been necessary to preserve 
competition when the Internet backbone was threatened by earlier 
corporate combinations and mergers. In 1998, when WorldCom, the owner 
of Internet backbone assets, proposed to acquire MCI, then the owner of 
UUNet backbone assets, the FCC required WorldCom to divest its backbone 
assets to Cable & Wireless.\23\ Similarly, when the FCC considered the 
merger application of Bell Atlantic and GTE (which resulted in the 
formation of Verizon), the FCC weighed the public interest impact of 
the consolidation of companies' Internet backbone holdings. Indeed, the 
FCC concluded that the merging parties had ``not demonstrated any 
merger-specific benefits to the market for Internet backbone 
services.'' \24\Accordingly, approval of the GTE/Bell Atlantic merger 
was conditioned, in part, on GTE's divestiture of its Internet 
backbone.\25\
---------------------------------------------------------------------------

    \23\ CC Docket No. 97-211--Application of WorldCom, Inc. and MCI 
Communications Corporation for Transfer of Control of MCI 
Communications Corporation to WorldCom, Inc., Memorandum Opinion and 
Order, FCC 98-225 (rel. Sept. 14, 1998).
    \24\ CC Docket No. 98-184--In re Application of GTE Corporation, 
Transferor, and Bell Atlantic Corporation, Transferee For Consent to 
Transfer Control of Domestic and International Sections 214 and 310 
Authorizations and Applications to Transfer Control of a Submarine 
Cable Landing License, Memorandum Opinion and Order, released June 
16, 2000, at ] 215.
    \25\ CC Docket 98-184, supra, at ] 215 (footnote omitted) 
(``Although we agree with the Applicants that the Internet backbone 
market is highly concentrated, we nonetheless conclude that the Bell 
Atlantic and GTE have presented insufficient evidence regarding how 
their proposed merger would alleviate such concentration and benefit 
consumers of long-haul data services.'').
---------------------------------------------------------------------------

    Taken together, the Verizon-MCI and SBC-AT&T mergers would 
significantly increase concentration in the Internet backbone market. 
Neither the FCC order nor the PFJ gave serious consideration to this 
critical issue, and to the effect of these mergers on the Internet 
backbone.
2. Verizon and MCI's Internet Backbones \26\
---------------------------------------------------------------------------

    \26\ We focus on the Verizon and MCI Internet backbone as 
Verizon is the major ILEC in New York State.
---------------------------------------------------------------------------

    MCI, by its own acknowledgement, owns ``one of the most extensive 
Internet protocol backbones.'' \27\ Recently, MCI reported that its 
backbone network ``has been recognized for the fourth consecutive year 
* * * as the world's most connected Internet backbone playing a 
critical role in the movement of Internet traffic. Our expansive IP 
footprint, coupled with our direct interconnections, enables our 
customers to reach more destinations directly through our global 
Internet backbone than any other communications provider.'' \28\
---------------------------------------------------------------------------

    \27\ MCI, Inc., 2003 Annual Report 2 (2004).
    \28\ MCI, Inc., 2004 Quarterly Report (for the period ending 
September 30, 2004) 33 (2004).
---------------------------------------------------------------------------

    MCI's extensive backbone thus represents an attractive, strategic 
asset. According to MCI's 2003 Annual Report, MCI occupies:

    a strategically important position within the communications 
market . . . availability due to the extremely rapid growth of 
Internet usage resulting from the increasing availability of high 
speed broadband access, the decreasing cost of all types of Internet 
access, the expanding volume of informative and entertaining 
content, the continued improvement in e-mail and instant messaging, 
and the ever increasing number of personal computers, and other 
devices for accessing the Internet. Corporations and government 
entities have responded by developing additional applications to run 
over the Internet that allow communications and e-commerce 
transactions with customers, communications with employees and the 
transfer of data among offices and operating units.\29\
---------------------------------------------------------------------------

    \29\ MCI, Inc., 2003 Annual Report 15 (2004).

    Although public information regarding Verizon's current Internet 
backbone ownership is incomplete, there can be no doubt that the 
opportunity to amass a dominant Internet backbone position is a driving 
force behind the company's decision to acquire MCI. As the companies 
---------------------------------------------------------------------------
stated in their Application to the FCC:

    The Verizon/MCI combination of product offerings will provide a 
stronger, and geographically broader, converged solution for large 
enterprises. Verizon currently has strong IP-based offerings, but 
they have limited reach within its area footprint and Verizon is not 
a major provider of IP-based services. MCI's core strength is its 
global Internet backbone, which provides global IP connectivity 
today, and will be able to provide next-generation VoIP and other 
IP-based services worldwide tomorrow.\30\
---------------------------------------------------------------------------

    \30\ Application, p. 17 (citations omitted).

    But the consolidation of Verizon's assets with MCI's Internet 
backbone also holds significant risks of adverse consequences to 
competition and innovation. The issues related to consolidation of the 
Internet backbone were not raised by the parties in their Joint 
Petition, which fails to identify: (1) Whether Verizon already controls 
a share of the Internet backbone, (2) the share of the Internet 
backbone held by MCI, and (3) the combined share of the Verizon/MCI 
assets. These risks were not addressed by DOJ in the Verizon-MCI PFJ, 
nor by the FCC in its approvals of the transactions. These omissions 
are striking.
    The Court should reject the Verizon-MCI merger unless and until 
Verizon provides the information needed to make an informed decision 
regarding the extent to which backbone concentration will increase as a 
result of the proposed merger with MCI. Based on that information, 
together with further public comment evaluating it, the appropriateness 
of divestiture of backbone assets should be assessed.
3. The Threat to Competition Is Concrete
    The consolidation of the Internet backbone as a result of the 
mergers is not an issue in the abstract. As the combined Verizon/MCI 
and SBC/AT&T move to offer more bundled product packages over their 
backbones--such as offering VOIP and video services--the increased need 
for bandwidth may strain their existing systems, encouraging Verizon 
and/or SBC to give priority to their own products. This prioritization 
would disadvantage consumers who use non-Verizon/SBC Internet service 
providers to access information and services that must

[[Page 17231]]

travel across the Verizon and SBC backbones.
    The proposed combinations also would adversely impact other 
Internet backbone providers who lack the capacity to offer the same 
panoply of services. The more extensive offerings would drive traffic 
to Verizon and SBC and, moreover, increase the companies' market share.
    Vital public policy, therefore, requires that Verizon's acquisition 
of MCI's Internet backbone, and SBC's acquisition of AT&T backbone, 
when combined with their current Internet backbone holdings, not 
diminish either consumers' or competitors' equal and unfettered access 
to the Internet.
4. The Mergers Risk Creating a Discriminatory Internet Class Structure
    There is a risk that, post-merger, Verizon and SBC will have 
Internet backbones that carry their own products in first class, while 
competitors ride in coach, pay more or never get to ride at all. A 
combined Verizon/MCI entity would be well positioned to create an 
Internet infrastructure that restricts access to the Internet backbone 
for countless businesses, institutions and individuals.\31\ At stake is 
nothing less than the ability of Internet access providers, such as 
Verizon and SBC, to limit or diminish consumers' access to Google, 
Vonage or any other content or service provider that does not pay its 
fees. The resulting Internet ``class structure'' would not only affect 
the ability of smaller competitors to participate in the marketplace of 
ideas and services, it risks drastically altering the character of the 
Internet. This would not only reverse the cultural and economic 
revolution that the Internet has inspired, but also would change the 
nature of the Internet, in which participants compete based on the 
quality of their content or services, not on their ability to pay fees 
to the backbone providers.
---------------------------------------------------------------------------

    \31\ By way of example, there exists today a process known as 
``tagging,'' which allows a provider to use rule-based and policy-
based filtering to limit the flow of data packets. If packets are 
``tagged,'' the network recognizes the class of service and priority 
assigned it for real-time delivery to ensure a high quality of 
service. Using tagging, Verizon could assign a higher transit 
priority--first class status--to data packets originating on its own 
system, while relating a lower priority--coach status--to the data 
packets from outside traffic that needs to access Verizon's Internet 
backbone.
---------------------------------------------------------------------------

    As demonstrated by recent Verizon and SBC statements, this danger 
is a likely near-term reality. Both SBC and Bell South have publicly 
advocated a two tiered Internet. SBC's public statements on the topic 
became more frequent after its acquisition of AT&T was approved.\32\ 
SBC Chairman Edward E. Whitacre, Jr. is one of the most vocal 
proponents of a tiered system, stating that ``Why should they be able 
to use my pipes? The Internet can't be free in that sense, because we 
and the cable companies have made an investment and for a Google or 
Yahoo or Vonage or anybody to expect to use these pipes free is nuts.'' 
\33\ As an Amazon.com representative said after hearing Mr. Whitacre's 
comments, ``What Mr. Whitacre's interview revealed was, I think he said 
two very distinct things. One is that the service providers have market 
power. * * * and part two was, we intend to use it.'' \34\ Though 
Verizon waited to clear all regulatory hurdles to the merger with MCI 
before addressing the issue, its position is in line with that of SBC. 
Verizon Chairman Ivan Seidenberg recently stated that, ``We have to 
make sure they don't sit on our network and chew our capacity.'' \35\
---------------------------------------------------------------------------

    \32\ Declan McCullagh, ``Playing favorites on the Net'', CNET 
News.com (Dec. 21, 2005) http://news.com.com/Playing+favorites+on+the+Net/2100-1028_3-6003281.html.
    \33\ Arshad Mohammed, ``SBC Head Ignites Access Debate,'' Wash. 
Post., Nov. 4, 2005 at D01.
    \34\ McCullagh, supra note 31.
    \35\ Dionne Searcey and Amy Schatz, ``Phone Compnies Set Off 
Battle Over Internet Fees,'' Wall St. Journal, Jan. 6, 2006 at A1.
---------------------------------------------------------------------------

IV. The PFJs Undo Thirty Years of Federal Telecommunication Competition 
Policy

    At least since DOJ commenced antitrust enforcement action against 
the national telephone monopoly, AT&T, over thirty years ago, resulting 
in the breakup of ``Ma Bell'' in 1984, the Federal government has 
pursued a policy to encourage competition in all sectors of the rapidly 
changing telecommunications industry. The PFJs represent a significant 
step backwards, and will likely lead to a more monopolistic industry in 
the future.
    MCI and AT&T have been the leading competitors to the regional Bell 
companies, Verizon and SBC, in the twenty years since the AT&T monopoly 
was broken up. However, as a result of these mergers, Verizon and SBC 
will become vertically integrated, dominant providers of local, long 
distance, wireless and Internet services to business and residential 
customers in large regions of the country. If these mergers proceed 
without stronger remedial protections, Verizon and SBC will be free to 
recreate within their regions the monopoly maintained by AT&T prior to 
1984.\36\ With the elimination of Verizon's and SBC's major competitors 
(MCI and AT&T), prices can be expected to rise, and telephone users, 
from large business customers to small businesses and residential 
customers, are likely to find fewer service choices. DOJ should have 
analyzed the national and regional impact of both mergers together and, 
at least, required divestiture substantial enough to create a realistic 
opportunity for industry participants to step into MCI's and AT&T's 
competitive shoes.
---------------------------------------------------------------------------

    \36\ Despite Verizon's and SBC's assertions that new 
technologies such as VOIP and cable telephony, as well as wireless 
providers pose significant competitive threats to the ILECs, it is 
premature to rely on such alternatives to substitute for the 
competition that MCI and AT&T have offered. These competitors do not 
play a significant role in business markets, having inadequate 
market share, reliability or security to handle sensitive data 
traffic. Thus, they cannot be relied upon to restrain Verizon or SBC 
from exercising market power after the merger.
---------------------------------------------------------------------------

    Additionally, Verizon and SBC will each have a powerful incentive 
to refrain from competing in each other's territory and to focus on 
their respective regions. The two telecommunications mammoths will have 
more to gain by selling each other limited LPL access, than by engaging 
in rigorous competition by installing their own last-mile loops in each 
other's region. Even without coordination, there is a substantial risk 
that each will follow its own economic interests by not competing, as 
long as the other does the same. This kind of tacit collusion or mutual 
forebearance is highly anticompetitive, whether or not the parties 
actually agree to form a cartel. The PFJs do nothing to counter this 
substantial threat.

V. Conclusion

    The Court should not give DOJ ``a pass'' in its review of these 
important mergers. The long term implications are too important for too 
many people and businesses in New York and, indeed, throughout the 
country. Nothing in the PFJs is likely to preserve effective 
competition at any level in the affected markets, or to prevent the 
harm to the public that will follow the reduction in competition. The 
proposed remedies are, at best, cosmetic. Based on the current state of 
affairs, the Court should reject the PFJs as insufficient and contrary 
to the public interest.

    Dated: New York, New York, February 13, 2006.
Respectfully Submitted,

Eliot Spitzer,
Attorney General of the State of New York.

By:

Jay L. Hines,

Chief, Antitrust Bureau

Mary Ellen Burns,
Special Counsel, Public Advocacy Division.

Jay L. Himes,

[[Page 17232]]

Chief, Antitrust Bureau.

Susanna Zwerling,
Chief Telecommunications & Energy Bureau.

Peter D. Bernstein,
Keith H. Gordon
Jeremy R. Kasha.
Assistant Attorneys General of Counsel.

120 Broadway, New York, NY 10271, Tel No.: (212) 416-8262, Fax No.: 
(212) 416-6015.
[FR Doc. 06-3090 Filed 4-4-06; 8:45 am]
BILLING CODE 4410-11-M